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

31 Pages Posted: 8 Jul 2020 Last revised: 11 Jan 2022

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

Multiple version iconThere are 2 versions of this paper

Date Written: June, 2020

Abstract

In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically 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. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.

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

Suggested Citation

Kabukçuoğlu Dur, Ayşe and Kabukçuoğlu Dur, Ayşe and Martinez-Garcia, Enrique, Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve (June, 2020). Globalization Institute Working Paper No. 392, Available at SSRN: https://ssrn.com/abstract=3645598 or http://dx.doi.org/10.24149/gwp392

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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