The new Keynesian Phillips curve: an update on recent empirical advances

This paper presents a comprehensive review of the newly emerging literature on the New Keynesian Phillips Curve (NKPC). The theoretical predictions, econometric estimation techniques as well as the corresponding empirical evidence are discussed focusing on both the closed economy and the open economy versions of the NKPC. A number of important findings are reported about the ability of NKPC to explain the process of inflation dynamics. First, there is weak support for the open economy version of the NKPC to be able to track inflation dynamics if imported inputs are used in the production process. Second, the NKPC describes inflation dynamics across sectors if microeconomic and sectoral level data are used. Further, the survey data employed as a proxy for inflation measure in the newer studies provide enhanced support to the closed economy NKPC with the sign, size and statistical significance of coefficients in line with the theoretical predictions. We provide fresh empirical evidence to check the first finding from the review. The deep structural parameters for four different versions of the NKPC, the pure forward looking NKPC, the Gali and Monacelli's (2005) NKPC, the open economy NKPC and the open economy hybrid NKPC, are estimated for Australia, Canada, New Zealand and the United Kingdom. These estimated coefficients show some support that the specifications of open economy NKPC, which incorporate prices of imported goods as opposed to the terms of trade and real exchange rate, seems to be a better, however, weak indicator of the inflation dynamics. These findings may have important policy implications.

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.