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An Open Economy New Keynesian Phillips Curve: Evidence from Hong Kong

This paper extends the new hybrid Keynesian Phillips curve (NKPC) to the open economy context. We hypothesise that pricing decisions depend on both labour costs and intermediate imported input prices. The results for Hong Kong are consistent with the theory if import prices are given substantial weight in measuring marginal cost, rejecting the labour costs model. We find that forward-looking behaviour is dominant, and that price stickiness is smaller in Hong Kong than in the USA. The results are sensitive to the choice of instruments, and a model using the output gap instead of marginal cost as the forcing variable also performs well.

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File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIWP03-2003.pdf
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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 03-2003.

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Length: 23
Date of creation: Nov 2003
Date of revision:
Publication status: Published in Pacific Economic Review, Special Issue on Deflation and Macroeconomic Issues in Hong Kong, Volume 10, 2, 2005, pages 261-277
Handle: RePEc:gii:giihei:heiwp03-2003
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  10. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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  16. Donald W.K. Andrews & Biao Lu, 1999. "Consistent Model and Moment Selection Criteria for GMM Estimation with Applications to Dynamic Panel Data Models," Cowles Foundation Discussion Papers 1233, Cowles Foundation for Research in Economics, Yale University.
  17. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  18. Hans Genberg & Laurent Pauwels, 2003. "Inlation in Hong Kong, SAR- In Search of a Transmission Mechanism," Working Papers 012003, Hong Kong Institute for Monetary Research.
  19. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  20. Edith Gagnon & Hashmat Khan, 2001. "New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area," Working Papers 01-25, Bank of Canada.
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