Regime Shifts and the Stability of Backward Looking Phillips Curves in Open Economies

Abstract

In this paper we assess the stability of open economy backward looking Phillips curves estimated across two different exchange rate regimes. The time series we deal with come from the simulation of a New-Keynesian hybrid model suited for performing monetary policy analysis. The statistical assessment we undertake is based on a standard Chow (1960) test. Our results confirm Lindè (2001)'s finding on the low power of the Chow test in small samples. However, we do not find strong statistical support for the quantitative relevance of the Lucas critique when the 'true' model of the economy is featured by low/intermediate degrees of forwardness.Lucas Critique, forwardness, backward looking Phillips curves, exchange rates, Chow test