Estimating open economy Phillips curves for the euro area with directly measured expectations

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Title: Estimating open economy Phillips curves for the euro area with directly measured expectations
Author: Paloviita, Maritta
Organization: Suomen Pankki
Series: Bank of Finland Research Discussion Papers
Series number: 16/2008
Year of publication: 2008
Publication date: 1.6.2008
Published in: Published in New Zealand Economic Papers, Vol 43, Issue 3, December 2009: 233-254
Pages: 35 s.
Keywords: inflaatio; avoin talous; euroalue; odotukset; Phillipsin käyrä;
Abstract: This paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s

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