Inflation As a Global Phenomenon - Some Implications for Inflation Modelling and Forecasting: Model Derivations and Additional Results

Abstract

Kabukçuoğlu and Martínez-García (Forthcoming) model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open-economy New Keynesian model. Then, Kabukçuoğlu and Martínez-García (Forthcoming) evaluate the pseudo out-of-sample performance of inflation forecasts based on the theoretically-consistent single-equation forecasting specification implied by theory, exploiting the international linkages of inflation. In this paper, we provide a detailed description of the structure of the workhorse open-economy New Keynesian model underlying their analysis derived from first principles. Furthermore, we characterize the solution of the log-linearized model under Wicksellian-style Taylor (1993) monetary policy rules and prove analytically the key equilibrium relationships that Kabukçuoğlu and Martínez-García (Forthcoming) use for inflation forecasting. We make note in particular of the role that the slope of the Phillips curve plays in the equilibrium solution of the workhorse open-economy New Keynesian model and for forecasting purposes. We also include additional results (robustness checks) that support and complement the pseudo out-of-sample forecasting evaluation exercises and the in-sample analysis of the fit of the model reported in Kabukçuoğlu and Martínez-García (Forthcoming).

Keywords: Inflation Dynamics, Open-Economy Phillips Curve, Forecasting

JEL Classification: C21, C23, C53, F41, F47, F62