Does Competition Enhancement Have Permanent Inflation Effects?

This paper presents evidence that a higher degree of product market competition leads to a permanently lower inflation rate. Among a broad set of possible candidate variables, the indicator for product market competition used in this paper (the markup) is superior in explaining inflation differentials across twenty-one OECD countries and also across the subset of EU member states. This confirms the results by Neiss (2001). Using an index for regulation of competition, it is confirmed that the markup is indeed a good proxy for product market competition.