The new Keynesian Phillips curve in a small open economy: empirical evidence from Australia

This study estimates the new Keynesian Phillips curve (NKPC) ofGali and Monacelli for a small open economy using Australian data.Our detailed investigation hinges on estimating the structuralparameters in five different variants of the Gali–Monacelli NKPC,which relates the inflation process to terms of trade and the realexchange rate; the marginal cost and output gap as proxies for realeconomic activity and the hybrid version incorporating bothforward- and backward-looking inflation expectations. The analysisand extensive robustness checks overwhelmingly establish that theGali–Monacelli NKPC cannot explain the dynamics of inflation andis rejected by the Australian data.