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Regime shifts and the stability of backward-looking Phillips curves in open economies

  • Castelnuovo, Efrem

In this paper we assess the stability of open economy backward-looking Phillips curves estimated over two different exchange rate regimes. The pseudo-data employed in our econometric exercise come from the simulation of a New-Keynesian hybrid model suited for performing monetary policy analysis. Two main results arise: i) in most of the simulated scenarios the estimated reduced-form Phillips curves turn out to be unstable. However, if the structural new-keynesian model is predominantly - even if not fully - backward-looking, the estimated reduced-form parameters are stable; ii) the Chow-breakpoint test tends to underestimate the importance of regime-shifts in small samples.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 1 (February)
Pages: 40-53

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:1:p:40-53
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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