Open AccessExternal competition flattens the Phillips Curve
Author(s) -
Alfonso Camba Crespo,
José García Solanes,
Fernando Torrejón Flores
Publication year - 2022
Publication title -
revista de economía mundial/revista de economía mundial
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.189
H-Index - 11
eISSN - 2340-4264
pISSN - 1576-0162
DOI - 10.33776/rem.v0i60.4962
Subject(s) - phillips curve , economics , exchange rate , competition (biology) , recession , great recession , inflation (cosmology) , output gap , impulse response , monetary economics , monetary policy , econometrics , macroeconomics , international economics , keynesian economics , physics , mathematical analysis , ecology , mathematics , theoretical physics , biology
In this paper we elaborate an open economy Phillips curve (OEPC) with micro-founded analysis, in which external competition significantly impacts the domestic inflation rate. This influence is transmitted through two channels: a) the gap between the current and potential growth of imports, and b) real exchange-rate misalignment. We estimate this OEPC by applying two econometric techniques, panel regressions and PVAR accompanied by impulse/response analysis. A sample of 15 advanced economies is used with data for the period 1994-2017. The results from both methodologies endorse the validity of this theoretical relationship and suggest that international competition reduces the pricing power of domestic firms, thereby curbing inflationary pressures. We also find that the slope of the OEPC has significantly declined in the years after the Great Recession.