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The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics

  • Alexander Mihailov
  • Fabio Rumler
  • Johann Scharler

This paper applies GMMestimation to assess empirically the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (2005). We obtain a testable specification where fluctuations in the terms of trade enter explicitly, thus allowing a comparison of the relevance of domestic versus external determinants of CPI inflation dynamics. For most countries in our sample the expected relative change in the terms of trade emerges as a more relevant inflation driver than the contemporaneous domestic output gap. Overall, our results indicate some, albeit moderate, support for the tested relationship based on data from ten OECD countries typically classified as open economies.

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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2008-17.

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Length: 24 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:jku:econwp:2008_17
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  4. Jeremy Rudd & Karl Whelan, 2006. "Can rational expectations sticky-price models explain inflation dynamics?," Open Access publications 10197/199, School of Economics, University College Dublin.
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  25. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
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