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The small open-economy New Keynesian Phillips Curve: empirical evidence and implied inflation dynamics

By Alexander Mihailov, Fabio Rumler and Johann Scharler

Abstract

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

Publisher: Springer Verlag
Year: 2011
OAI identifier: oai:centaur.reading.ac.uk:17748

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