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The New Keynesian Phillips Curve in an Emerging Market Economy: The Case of Chile

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  • Luis F. Céspedes
  • Marcelo Ochoa
  • Claudio Soto

Abstract

This paper presents GMM empirical estimations of the New Keynesian Phillips curve (NKPC) for Chile. Our results tend to support the hybrid version of the NKPC, with an estimated backward-looking coefficient of about 0.4. The estimated Calvo coefficient, that captures the degree of price rigidity, assuming firm specific capital is about 0.65. This implies that prices are optimally adjusted on average every 3 quarters, approximately. Our results also indicate the existence of a structural break in the NKPC, which occurred when the inflation target converged to its long-run level (around 2000). We find evidence that the frequency of optimal price adjustment and the degree of indexation to past inflation have decreased over time.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 355.

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Date of creation: Dec 2005
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Handle: RePEc:chb:bcchwp:355

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References

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  1. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series 93-17, Board of Governors of the Federal Reserve System (U.S.).
  2. Gagnon, Edith & Khan, Hashmat, 2005. "New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area," European Economic Review, Elsevier, vol. 49(6), pages 1571-1602, August.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  5. Sowell, Fallaw, 1996. "Optimal Tests for Parameter Instability in the Generalized Method of Moments Framework," Econometrica, Econometric Society, vol. 64(5), pages 1085-1107, September.
  6. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience," International Finance, Wiley Blackwell, vol. 8(3), pages 545-575, December.
  7. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  8. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
  9. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  11. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  12. McAdam, Peter & Willman, Alpo, 2003. "New Keynesian Phillips Curves: a reassessment using euro-area data," Working Paper Series 0265, European Central Bank.
  13. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
  14. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  15. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  16. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Volker Wieland, 2008. "Learning, Endogenous Indexation, and Disinflation in the New-Keynesian Model," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 21-44, December.
  2. Pablo Pincheira & Álvaro García, 2007. "Oil Shocks and Inflation The Case of Chile and a Sample of Industrial Countries," Working Papers Central Bank of Chile 413, Central Bank of Chile.
  3. Lavan Mahadeva & Juan Carlos Parra Alvarez, . "Testing a DSGE model and its partner database," Borradores de Economia 479, Banco de la Republica de Colombia.
  4. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.
  5. Felipe Morandé L. & Mauricio Tejada G., 2009. "Persistent Supply Shocks: A Pain in the Neck for Central Banks?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(3), pages 25-58, December.
  6. Felipe Morandé & Mauricio Tejada, 2009. "Sources of Uncertainty in Conducting Monetary Policy in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 12, pages 451-509 Central Bank of Chile.
  7. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
  8. Joseph S. Vavra, 2014. "Time-Varying Phillips Curves," NBER Working Papers 19790, National Bureau of Economic Research, Inc.
  9. J. Marcelo Ochoa C., 2009. "Monetary Policy Efficiency in Chile were there any Improvements?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(1), pages 39-49, April.
  10. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.
  11. Pablo Pincheira & Hernán Rubio, 2010. "The Low Predictive Power of Simple Phillips Curves in Chile: A Real-Time Evaluation," Working Papers Central Bank of Chile 559, Central Bank of Chile.

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