The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics |
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Authors: | Alexander Mihailov Fabio Rumler Johann Scharler |
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Institution: | (1) School of Economics, University of Reading, Whiteknights, RG6 6AA Reading, United Kingdom;(2) Economic Analysis Division, Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1090 Vienna, Austria;(3) Department of Economics, University of Linz, Altenbergerstrasse 69, A-4040 Linz, Austria |
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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. |
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