Research Discussion Paper – RDP 08 Price Equations for Australia Introduction

This paper develops equations explaining the implicit deflator of gross national product and a number of its important components. In these equations, prices are related to variables representing both cost and demand influences. More specifically, prices are typically explained by unit labour and replacement costs, pressure of demand upon capacity variables and, where relevant, indirect tax rates.

The plan of the paper is as follows. In section 2, the broad structure of the price sector in a typical economy-wide model is discussed and, in section 3, the principal issues in the literature on price equations are examined. Section 4 outlines the theoretical model underlying the equations. In section 5, the variables used in the regressions are defined while in section 6 the sources of the data are given. In sections 7, 8 and 9, the regression estimates are reported and, in section 10, some conclusions are drawn.