An Expectations-Augmented Phillips Curve in an Open Economy
AbstractIn this paper an expectations-augmented Phillips curve relation in an open economy is derived and estimated. As in Rotemberg´s (1982) model firms are assumed to face quadratic price adjustment costs. In addition, second-order costs of changing prices are not included. Consequently the derived inflation equation incorporates not only a forward-looking component but also a backward-looking element. The model is then estimated on Swedish data. The results from this estimation shed light in the importance of inflation expectations for the development of current inflation in comparison to past inflation rates. This is, for example, of great importance to a central bank trying to achive an inflation target. A common characteristic of inflation targeting models is that with a lower degree of persistence in inflation, a credible central bank can achive its inflation target with relatively little loss in output.
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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 108.
Length: 27 pages
Date of creation: 01 Jun 2000
Date of revision:
Phillips curve; Monetary policy;
Find related papers by JEL classification:
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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- Nessen, Marianne & Vestin, David, 2005.
"Average Inflation Targeting,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 37(5), pages 837-63, October.
- Holmberg, Karolina, 2006. "Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy," Working Paper Series 197, Sveriges Riksbank (Central Bank of Sweden).
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