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

In this paper we apply GMM estimation to assess the relevance of domestic versus external determinants of CPI inflation dynamics in a sample of OECD countries typically classified as open economies. The analysis is based on a variant of the small open-economy New Keynesian Phillips Curve derived in...

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Bibliographic Details
Published in:Open economies review 2011-04, Vol.22 (2), p.317-337
Main Authors: Mihailov, Alexander, Rumler, Fabio, Scharler, Johann
Format: Article
Language:English
Subjects:
Analysis
Consumer Price Index
Consumption
Determinants
Development Economics
Discount rates
Dynamics
Economic Policy
Economics
Economics and Finance
European Integration
Generalized method of moments
Inflation
International Economics
International trade
Keynesian theory
Macroeconomics/Monetary Economics//Financial Economics
Monetary policy
Neokeynesianism
Open economies
Output gap
Phillips curve
Research Article
Studies
Terms of trade
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Summary:In this paper we apply GMM estimation to assess the relevance of domestic versus external determinants of CPI inflation dynamics in a sample of OECD countries typically classified as open economies. The analysis is based on a variant of the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (Rev Econ Stud 72:707–734, 2005 ), where the novel feature is that expectations about fluctuations in the terms of trade enter explicitly. For most countries in our sample the expected relative change in the terms of trade emerges as the more relevant inflation driver than the contemporaneous domestic output gap.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-009-9125-9