New Keynesian Phillips curve for Estonia, Latvia and Lithuania

Aurelijus Dabušinskas () and Dmitry Kulikov ()

No 2007-07, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper presents an empirical analysis of the inflation process in Estonia, Latvia and Lithuania within the framework of the New Keynesian Phillips Curve (NKPC) model of Galí and Gertler (1999) and Galí et al. (2001). An open economy extension by Leith and Malley (2003) and a NKPC model that explicitly incorporates energy into the average real marginal cost measure are also considered. The primary focus of the paper is to identify and compare the underlying structural parameters of the NKPC model across the three Baltic economies. Empirical NKPC model estimates point to a limited role of the cost measure in determining inflation dynamics in the three Baltic countries. It has been found that the inflation process in these countries primarily depends on inflation expectations and past inflation rates. Price setting flexibility, as measured by the price stickiness parameter, tends to be lower than in the euro area but higher than in the US, while the share of backward-looking price setters is found to be higher on average.

Keywords: New Keynesian Phillips Curve; inflation dynamics; open economy (search for similar items in EconPapers)
JEL-codes: E31 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
Date: 2007-08-26, Revised 2007-08-26
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