Estimated Open Economy - New Keynesian Phillips Curves for the G7

30 Pages Posted: 22 Jan 2003

See all articles by Campbell Leith

Campbell Leith

University of Glasgow - Department of Economics

Jim Malley

University of Glasgow - Department of Economics

Date Written: January 2003

Abstract

In this paper we develop an open economy model of firms' pricing behaviour under imperfect competition. This allows us to introduce various terms of trade effects influencing the firm's pricing decision, in addition to labour costs which dominate most closed-economy specifications of the New Keynesian Phillips (NKPC) curve. Our analysis gives rise to a hybrid open economy NKPC which nests existing closed and open economy specifications adopted in empirical work. We estimate this specification for the G7 economies and find that the US, UK and Canada typically enjoy less inertia in price setting than the European G7 economies and Japan and that these estimates are both plausible and in line with survey evidence. We also find that the proportion of firms which use simple backward-looking rules of thumb in price setting is greater when the frequency of price change is smaller. Finally there is evidence of significant asymmetries in price setting amongst EMU members.

JEL Classification: E3

Suggested Citation

Leith, Campbell and Malley, Jim, Estimated Open Economy - New Keynesian Phillips Curves for the G7 (January 2003). Available at SSRN: https://ssrn.com/abstract=371581 or http://dx.doi.org/10.2139/ssrn.371581

Campbell Leith

University of Glasgow - Department of Economics ( email )

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Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

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United Kingdom
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