DP3582 The Open Economy Phillips Curve: 'New Keynesian' Theory and Evidence

Author(s): Prakash Loungani, Assaf Razin, Chi-Wa Yuen
Publication Date: October 2002
Keyword(s): imperfect competition in the product market, new Keynesian Phillips curve, Phillips curve, sacrifice ratios, strategic interactions among price setters
JEL(s): E12, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3582

The Paper derives an open economy New-Keynesian Phillips curve. The Phillips curve depends on growth in the domestic economy excess capacity, differential growth between foreign output and domestic output, and on the surprise depreciation of the real exchange rate. The Paper provides new evidence on the effect of globalization of the economy, in both the trade and capital transactions, in the Phillips curve. The evidence is consistent with the predictions of the theory.