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The New Keynesian Phillips Curve in an Emerging Market Economy: The Case of Chile

  • Luis F. Céspedes
  • Marcelo Ochoa
  • Claudio Soto

This paper presents GMM empirical estimations of the New Keynesian Phillips curve (NKPC) for Chile. Our results tend to support the hybrid version of the NKPC, with an estimated backward-looking coefficient of about 0.4. The estimated Calvo coefficient, that captures the degree of price rigidity, assuming firm specific capital is about 0.65. This implies that prices are optimally adjusted on average every 3 quarters, approximately. Our results also indicate the existence of a structural break in the NKPC, which occurred when the inflation target converged to its long-run level (around 2000). We find evidence that the frequency of optimal price adjustment and the degree of indexation to past inflation have decreased over time.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 355.

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Date of creation: Dec 2005
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Handle: RePEc:chb:bcchwp:355
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  1. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  2. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  3. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  4. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  5. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  6. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience," International Finance, Wiley Blackwell, vol. 8(3), pages 545-575, December.
  7. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  9. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
  10. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  11. Sowell, Fallaw, 1996. "Optimal Tests for Parameter Instability in the Generalized Method of Moments Framework," Econometrica, Econometric Society, vol. 64(5), pages 1085-1107, September.
  12. Devereux, Michael B & Yetman, James, 2001. "Predetermined Prices and the Persistent Effects of Money on Output," CEPR Discussion Papers 2917, C.E.P.R. Discussion Papers.
  13. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  14. Gagnon, Edith & Khan, Hashmat, 2005. "New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area," European Economic Review, Elsevier, vol. 49(6), pages 1571-1602, August.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  16. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  17. McAdam, Peter & Willman, Alpo, 2003. "New Keynesian Phillips Curves: a reassessment using euro-area data," Working Paper Series 0265, European Central Bank.
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