Estimated Open Economy New Keynesian Phillips Curves for the G7

Abstract

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Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries

“…However, the elasticity of demand of the firm's product, ε, cannot be estimated econometrically, as it does not appear in the estimation equation, but has to be calibrated in order to derive an empirical value for the the elasticity of substitution between capital and the variable factors of production, φ. In calibrating ε we follow the literature (see Gali et al [7], Leith and Malley [11]) and adopt a value of 11 as a baseline implying a steady-state markup of prices over marginal costs µ = In the model the price set by a firm is its output price. The output is then used for final consumption demand and intermediate inputs of other forms at home or abroad.…”

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

“…Our analysis is partly related to Leith and Malley (2007) and Rumler (2007), who also estimate open-economy versions of the NKPC although in a less explicit way. In contrast to our paper, these authors focus on parameters such as the degree of backwardand forward-lookingness, the Calvo probability of a price change, and the degree of imperfect substitutability between domestic and foreign intermediate inputs, without examining in more detail the role of external-sector inflation drivers.…”

Evaluating the German (New Keynesian) Phillips curve

“…The primary evidence stems from cross country comparisons. Examples are Banerjee and Batini (2004), Benigno and López-Salido (2006), Leith and Malley (2007) or Rumler (2007). This evidence is in most cases based upon GMM estimation with additional aspects of an open economy.…”

“…This evidence is in most cases based upon GMM estimation with additional aspects of an open economy. While the open economy aspect seems to be unimportant for German Phillips curve (at least according to Banerjee and Batini, 2004;Leith and Malley, 2007), their results vary considerably with respect to the degree of nominal price rigidity. The estimated average frequency of price re-optimization ranges from 2.5 quarters (Banerjee and Batini, 2004) to 13 quarters (Leith and Malley, 2007).…”

“…While the open economy aspect seems to be unimportant for German Phillips curve (at least according to Banerjee and Batini, 2004;Leith and Malley, 2007), their results vary considerably with respect to the degree of nominal price rigidity. The estimated average frequency of price re-optimization ranges from 2.5 quarters (Banerjee and Batini, 2004) to 13 quarters (Leith and Malley, 2007). Additionally, there is also disagreement on whether the inflation contains a lagged term (through backward looking behavior) or whether it is purely forward looking.…”