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

Listed author(s):
  • Alexander Mihailov

    ()

    (School of Economics, University of Reading)

  • Fabio Rumler

    ()

    (Economic Analysis Division, Oesterreichische Nationalbank)

  • Johann Scharler

    ()

    (Department of Economics, University of Linz)

This paper applies GMM estimation 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 Henley Business School, Reading University in its series Economics & Management Discussion Papers with number em-dp2008-63.

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Length: 25 pages
Date of creation: 15 Nov 2008
Handle: RePEc:rdg:emxxdp:em-dp2008-63
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  1. Karl Whelan & Jeremy Rudd, 2001. "New tests of the New-Keynesian Phillips Curve," Open Access publications 10197/249, School of Economics, University College Dublin.
  2. Campbell Leith & Jim Malley, 2003. "Estimated Open Economy New Keynesian Phillips Curves for the G7," CESifo Working Paper Series 834, CESifo Group Munich.
  3. Olivier Blanchard & Jordi Gali, 2005. "Real Wage Rigidities and the New Keynesian Model," NBER Working Papers 11806, National Bureau of Economic Research, Inc.
  4. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 45-78.
  5. Karl Whelan & Jeremy Rudd, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," Computing in Economics and Finance 2003 181, Society for Computational Economics.
  6. Rudd, Jeremy & Whelan, Karl, 2005. "Modelling Inflation Dynamics: A Critical Review of Recent Research," Research Technical Papers 7/RT/05, Central Bank of Ireland.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  8. Assaf Razin & Alon Binyamini, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy: Outcome of Globalization?," NBER Working Papers 13280, National Bureau of Economic Research, Inc.
  9. Frederic S. Mishkin, 2008. "Globalization, Macroeconomic Performance, and Monetary Policy," NBER Working Papers 13948, National Bureau of Economic Research, Inc.
  10. William R White, 2008. "Globalisation and the determinants of domestic inflation," BIS Working Papers 250, Bank for International Settlements.
  11. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September.
  12. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2003. "Erratum to "European inflation dynamics": [European Economic Review 45 (2001), 1237-1270]," European Economic Review, Elsevier, vol. 47(4), pages 759-760, August.
  13. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
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  15. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
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  17. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
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  21. repec:rdg:wpaper:em-dp2007-52 is not listed on IDEAS
  22. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: The Impact of Increased Competition," NBER Chapters, in: International Dimensions of Monetary Policy, pages 547-579 National Bureau of Economic Research, Inc.
  23. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
  24. Razin, Assaf & Yuen, Chi-Wa, 2001. "The 'New Keynesian' Phillips Curve: Closed Economy versus Open Economy," CEPR Discussion Papers 3083, C.E.P.R. Discussion Papers.
  25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  27. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Exchange rate determination under interest rate rules," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 971-993, October.
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