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An Expectations-Augmented Phillips Curve in an Open Economy

Author

Listed:
  • Hallsten, Kerstin

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

In this paper an expectations-augmented Phillips curve relation in an open economy is derived and estimated. As in Rotemberg´s (1982) model firms are assumed to face quadratic price adjustment costs. In addition, second-order costs of changing prices are not included. Consequently the derived inflation equation incorporates not only a forward-looking component but also a backward-looking element. The model is then estimated on Swedish data. The results from this estimation shed light in the importance of inflation expectations for the development of current inflation in comparison to past inflation rates. This is, for example, of great importance to a central bank trying to achive an inflation target. A common characteristic of inflation targeting models is that with a lower degree of persistence in inflation, a credible central bank can achive its inflation target with relatively little loss in output.

Suggested Citation

  • Hallsten, Kerstin, 2000. "An Expectations-Augmented Phillips Curve in an Open Economy," Working Paper Series 108, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0108
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    Cited by:

    1. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-863, October.
    2. Holmberg, Karolina, 2006. "Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy," Working Paper Series 197, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    Phillips curve; Monetary policy;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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