Online Appendix: Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve

31 Pages Posted: 29 Jul 2020

See all articles by Ayşe Kabukcuoglu Dur

Ayşe Kabukcuoglu Dur

North Carolina State University; North Carolina State University - Department of Economics

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Date Written: June 15, 2020

Abstract

In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past several decades. We study the linkages between domestic inflation and global liquidity (money and household balances) and argue that it is important for inflation modeling and forecasting. We introduce money and credit markets into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation can be based solely on domestic and foreign slack, and (ii) global liquidity (either global money or global credit) is tied to global slack in equilibrium. In this technical appendix, we derive these theoretical results which can be used to empirically evaluate the performance of open-economy Phillips curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. We also include additional results not found elsewhere: in particular, we document that global liquidity variables also perform significantly better than the domestic variable counterparts and outperform in practice the poorly-measured indicators of global slack when expressed in real terms (not just in nominal terms).

Keywords: Global Slack, Global Liquidity, New Open-Economy Phillips Curve, Open-Economy New Keynesian Model, Forecasting

JEL Classification: F41, F44, F47, C53, F62

Suggested Citation

Kabukçuoğlu Dur, Ayşe and Kabukçuoğlu Dur, Ayşe and Martinez-Garcia, Enrique, Online Appendix: Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3642966 or http://dx.doi.org/10.2139/ssrn.3642966

Ayşe Kabukçuoğlu Dur

North Carolina State University ( email )

2801 Founders Dr
Raleigh, NC 27695
United States

HOME PAGE: http://aysekabukcuoglu.weebly.com

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

HOME PAGE: http://aysedur.com

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

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