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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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  • Campbell Leith & Jim Malley, 2007. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Open Economies Review, Springer, vol. 18(4), pages 405-426, September.
    • Handle: RePEc:kap:openec:v:18:y:2007:i:4:p:405-426
    DOI: 10.1007/s11079-007-9008-x
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    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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