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

Alexander Mihailov (), Fabio Rumler () and Johann Scharler

No em-dp2008-63, Economics & Management Discussion Papers from Henley Business School, Reading University

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.

Keywords: New Keynesian Phillips Curve; small open economies; terms of trade fluctuations; inflation dynamics; GMM estimation (search for similar items in EconPapers)
JEL-codes: C32 C52 E31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
Date: 2008

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Related works:
Working Paper: The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:rdg:emxxdp:em-dp2008-63

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