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 over two different exchange rate regimes. The pseudo-data employed in our econometric exercise come from the simulation of a New-Keynesian hybrid model suited for performing monetary policy analysis. Two main results arise: i) in most of the simulated scenarios the estimated reduced-form Phillips curves turn out to be unstable. However, if the structural new-keynesian model is predominantly - even if not fully - backward-looking, the estimated reduced-form parameters are stable; ii) the Chow-breakpoint test tends to underestimate the importance of regime-shifts in small samples.Lucas Critique, forwardness, backward looking Phillips curves, exchange rates, Chow test.