32 Pages Posted: 7 Sep 2011
Date Written: February 19, 2008
This paper analyses the interconnectedness between the slope of the Phillips Curve and the degree of trade openness. A micro founded expectations - augmented Phillips Curve for a small open economy illustrates that the slope of the Phillips Curve is negatively related to the degree of trade integration in an open economy. The model shows that the monetary authority should place a higher weight on stabilising ination than the output gap when the economy becomes more open to trade. Estimating a nonlinear model where the slope is time varying and depends on openness, the papers empirical results indicate support for the negative relationship between the degree of trade openness and the slope of the Phillips Curve across the G-7 countries.
Keywords: Output-Ination Trade-Off, Openness, Censored model
JEL Classification: C23, F41, G15
Suggested Citation: Suggested Citation