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Estimating open economy Phillips curves for the euro area with directly measured expectations

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  • Paloviita, Maritta

Abstract

This paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s

Suggested Citation

  • Paloviita, Maritta, 2008. "Estimating open economy Phillips curves for the euro area with directly measured expectations," Research Discussion Papers 16/2008, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2008_016
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    Cited by:

    1. Dieppe, Alistair & Ortega, Eva & D'Agostino, Antonello & Karlsson, Tohmas & Benkovskis, Konstantins & Caivano, Michele & Hurtado, Samuel & Várnai, Tímea, 2011. "Assessing the sensitivity of inflation to economic activity," Working Paper Series 1357, European Central Bank.
    2. Maritta Paloviita, 2009. "On the Generality of the New Keynesian Phillips Curves," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(55), pages 7-32, July - Se.
    3. Carlos Medel, 2017. "Forecasting Chilean inflation with the hybrid new keynesian Phillips curve: globalisation, combination, and accuracy," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 20(3), pages 004-050, December.
    4. Medel, Carlos A., 2015. "Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach," MPRA Paper 67081, University Library of Munich, Germany.
    5. Robert Anderton & Alessandro Galesi & Marco Lombardi & Filippo di Mauro, 2010. "Key Elements of Global Inflation," RBA Annual Conference Volume,in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
    6. Robert Anderton & Paul Hiebert, "undated". "The Impact of Globalisation on the Euro Area Macroeconomy," Discussion Papers 09/14, University of Nottingham, GEP.

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