In this paper the long-run relationship between relative price and inflation has been examined for the U.K historical price data set. Generally, the traditional inference procedures are inappropriate since relative price and inflation series are non-s...
In this paper the long-run relationship between relative price and inflation has been examined for the U.K historical price data set. Generally, the traditional inference procedures are inappropriate since relative price and inflation series are non-stationary. Two significant findings are reported in the paper. First, it is demonstrated, using a multivariate cointegration technique, that a long-run relationship between relative price and inflation is an exist. Second, we apply the Phillips-Hansen fully modified estimation to test this relationship and found that the relationships can be rejected for all the sample periods examined.