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The New Keynesian Phillips Curve in a Small Open Economy: Empirical Evidence from Australia
Author(s) -
Abbas Syed Kanwar,
Bhattacharya Prasad Sankar,
Mallick Debdulal,
Sgro Pasquale
Publication year - 2016
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12262
Subject(s) - phillips curve , economics , new keynesian economics , output gap , inflation (cosmology) , keynesian economics , robustness (evolution) , marginal cost , open economy , econometrics , exchange rate , small open economy , macroeconomics , monetary policy , neoclassical economics , biochemistry , chemistry , physics , theoretical physics , gene
This study estimates the new Keynesian Phillips curve ( NKPC ) of Gali and Monacelli for a small open economy using Australian data. Our detailed investigation hinges on estimating the structural parameters in five different variants of the Gali–Monacelli NKPC , which relates the inflation process to terms of trade and the real exchange rate; the marginal cost and output gap as proxies for real economic activity and the hybrid version incorporating both forward‐ and backward‐looking inflation expectations. The analysis and extensive robustness checks overwhelmingly establish that the Gali–Monacelli NKPC cannot explain the dynamics of inflation and is rejected by the Australian data.