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Estimated Open Economy New Keynesian Phillips Curves for the G7

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  • Campbell Leith

    ()

  • Jim Malley

Abstract

In this paper we develop an open economy model of firms’ pricing behaviour under imperfect competition. This allows us to introduce various terms of trade effects influencing the firm’s pricing decision, in addition to labour costs which dominate most closed-economy specifications of the New Keynesian Phillips curve (NKPC). Our analysis gives rise to a hybrid open economy NKPC which nests existing closed and open economy specifications adopted in empirical work. We estimate this specification for the G7 economies and find that the US, UK and Canada typically enjoy less inertia in price setting than the European G7 economies and Japan and that these estimates are both plausible and in line with survey evidence. We also find that the proportion of firms which use simple backward-looking rules of thumb in price setting is greater when the frequency of price change is smaller. Finally there is evidence of significant asymmetries in price setting amongst EMU members. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11079-007-9008-x
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 18 (2007)
Issue (Month): 4 (September)
Pages: 405-426

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Handle: RePEc:kap:openec:v:18:y:2007:i:4:p:405-426

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: New Keynesian Phillips curve; Open economy pricing decisions; Marginal costs; E3;

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  1. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
  2. Bennett McCallum, 2002. "Inflation Targeting and the Liquidity Trap," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 9, pages 395-438 Central Bank of Chile.
  3. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  5. Leith, Campbell & Malley, Jim, 2005. "Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe," European Economic Review, Elsevier, vol. 49(8), pages 2137-2159, November.
  6. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  7. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
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  11. Jordi Galí & David López-Salido, 2001. "A New Phillips Curve for Spain," Banco de Espa�a Working Papers 0109, Banco de Espa�a.
    • Jordi Galí & J David López-Salido, 2001. "A New Phillips curve for Spain," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 174-203 Bank for International Settlements.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  13. Ravi Balakrishnan & J David Lopez-Salido, 2002. "Understanding UK inflation: the role of openness," Bank of England working papers 164, Bank of England.
  14. Fabio Rumler, 2005. "Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries," Working Papers 102, Oesterreichische Nationalbank (Austrian Central Bank).
  15. Bennett T. McCallum, 2001. "Inflation Targeting and the Liquidity Trap," NBER Working Papers 8225, National Bureau of Economic Research, Inc.
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