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The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy

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  • Thorvardur Tjörvi Ólafsson

Abstract

This paper provides a survey on the recent literature on the new Keynesian Phillips curve: the controversies surrounding its microfoundation and estimation, the approaches that have been tried to improve its empirical fit and the challenges it faces adapting to the open-economy framework. The new Keynesian Phillips curve has been severely criticized for poor empirical dynamics. Suggested improvements involve making some adjustments to the standard sticky price framework, e.g. introducing backwardness and real rigidities, or abandoning the sticky price model and relying on models of inattentiveness, learning or state-dependant pricing. The introduction of openeconomy factors into the new Keynesian Phillips curve complicate matters further as it must capture the nexus between price setting, inflation and the exchange rate. This is nevertheless a crucial feature for any model to be used for inflation forecasting in a small open economy like Iceland.

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  • Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
  • Handle: RePEc:ice:wpaper:wp31_tjorvi
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    1. Nicola Viegi & Vincent Dadam, 2020. "Estimating a New Keynesian Wage Phillips Curve," Working Papers 11000, South African Reserve Bank.
    2. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    3. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo.
    4. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
    5. Rumler, Fabio & Valderrama, Maria Teresa, 2010. "Comparing the New Keynesian Phillips Curve with time series models to forecast inflation," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 126-144, August.
    6. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    7. Phiri, Andrew, 2015. "Examining asymmetric effects in the South African Philips curve: Evidence from logistic smooth transition regression (LSTR) models," MPRA Paper 64487, University Library of Munich, Germany.
    8. Faith Christian Cacnio, 2013. "Analysing inflation dynamics in the Philippines using the new Keynesian Phililips curve," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 50(2), pages 53-82, December.

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