RDP 2001-02: Changes in the Determinants of Inflation in Australia Appendix D: Inflation Equation

The inflation equation is estimated from the March quarter 1985. Results from an error-correction equation are shown below. In the equation, linear homogeneity is accepted and has been imposed.

Table D1: Explaining Consumer Prices(a)
Estimated from 1985:Q1 to 2000:Q1
  Coefficient Std error
Independent variable
Constant −0.4277 0.3879
Consumer prices (lag 1) −0.0690 0.0091***
Unit labour costs (lag 1) 0.0391 0.0135***
Landed import prices (lag 1) 0.0299 0.0061***
Unit labour cost growth (lag 0) 0.0467 0.0308
Landed import price growth (lag 0) 0.0363 0.0139**
Oil price growth (lag 1) 0.0075 0.0030**
Output gap (lag 3) 0.1699 0.0270***
Change in the Output Gap (Lags 0,1,2)(b) 0.0848 0.0345**
Dummy 1990:Q4(c) 0.9766 0.3041***
Dummy 1991:Q1 −1.3333 0.3033***
Dummy 1999:Q1 −0.4824 0.2721*
Long-run elasticities
Unit labour costs 0.5662 0.1296
Landed import prices 0.4338 0.1296
Adjusted R2 0.8670  
Residual autocorrelation LM(4)   {0.3810}
Breusch-Pagan heteroscedasticity test   {0.1439}
Jarque-Bera normality test   {0.5399}
Linear homogeneity(d)   {0.1819}

Notes: (a) Equation is an updated version of that in Beechey et al (2000). ***, ** and * represent significance at the 1, 5 and 10 per cent levels. Numbers in braces {} are p-values. All variables in log-levels are multiplied by 100 (so growth rates are in percentages).
(b) The restriction that the coefficients on each lag are equal is accepted and imposed.
(c) The dummies allow for large but short-lived spikes in oil prices.
(d) Linear homogeneity implies that the sum of the coefficients of unit labour costs and landed import prices is equal to the absolute value of the coefficient of consumer prices.