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

Author

Listed:
  • Alexander Mihailov

    (School of Economics, University of Reading)

  • Fabio Rumler

    (Economic Analysis Division, Oesterreichische Nationalbank)

  • Johann Scharler

    (Department of Economics, University of Linz)

Abstract

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.

Suggested Citation

  • Alexander Mihailov & Fabio Rumler & Johann Scharler, 2008. "The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics," Economics Discussion Papers em-dp2008-63, Department of Economics, University of Reading.
  • Handle: RePEc:rdg:emxxdp:em-dp2008-63
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    References listed on IDEAS

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    More about this item

    Keywords

    New Keynesian Phillips Curve; small open economies; terms of trade fluctuations; inflation dynamics; GMM estimation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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