New Keynesian Phillips curve for Estonia, Latvia and Lithuania
AbstractThis paper presents an empirical analysis of the inflation process in Estonia, Latvia and Lithuania within the framework of the New Keynesian Phillips Curve (NKPC) model of Galí and Gertler (1999) and Galí et al. (2001). An open economy extension by Leith and Malley (2003) and a NKPC model that explicitly incorporates energy into the average real marginal cost measure are also considered. The primary focus of the paper is to identify and compare the underlying structural parameters of the NKPC model across the three Baltic economies. Empirical NKPC model estimates point to a limited role of the cost measure in determining inflation dynamics in the three Baltic countries. It has been found that the inflation process in these countries primarily depends on inflation expectations and past inflation rates. Price setting flexibility, as measured by the price stickiness parameter, tends to be lower than in the euro area but higher than in the US, while the share of backward-looking price setters is found to be higher on average.
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Bibliographic InfoPaper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2007-07.
Date of creation: 26 Aug 2007
Date of revision: 26 Aug 2007
Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-02 (All new papers)
- NEP-CBA-2007-06-02 (Central Banking)
- NEP-EEC-2007-06-02 (European Economics)
- NEP-MAC-2007-06-02 (Macroeconomics)
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