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Sectoral inflationary dynamics: cross-country evidence on the open-economy New Keynesian Phillips Curve

  • Hülya SaygılıEmail author
Original Paper
  • 11 Downloads

Abstract

Introduction

This paper empirically evaluates the significance of domestic and external factors on two-digit sectoral inflation dynamics in a sample of OECD countries using open-economy New Keynesian Phillips Curve models. It focuses on the independent impacts of imported consumption goods and intermediate inputs on sectoral inflation dynamics to investigate whether there is a systematic relationship between the extent of production integration and estimated sensitivities.

Methods

The study begins with a formal analysis to show in which channels consumption goods and intermediate inputs affect inflation in the open-economy NKPC models. Then it employs the Prais-Winsten regression heteroskedastic panels corrected standard errors (PCSE) approach, rather than the GMM, to overcome various covariation issues in the empirical analysis.

Results

The results suggest that both domestic and external factors play significant roles in inflation dynamics. Impacts vary across sectors depending on the degree of integration into the global value chains and the nature of trade matters in detecting the appropriate trade effects on inflation.

Conclusion

These results are of interest to policymakers since the heterogeneity in price-setting behavior among sectors complicates the monetary policy transmission mechanism. The finding that inflation dynamics is jointly determined by domestic and external factors necessitates coordination of domestic monetary policy and trade, as well as industrial policies. Trade and industrial policies need to be sector-specific and designed to improve competition in domestic and international markets to enhance the effectiveness of monetary policies.

Keywords

Open-economy New Keynesian Phillips Curve Sectoral inflation dynamics Global value chains Consumption goods trade Intermediate goods trade 

JEL Classification

C23 E31 F41 

Notes

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Copyright information

© Kiel Institute 2019

Authors and Affiliations

  1. 1.Structural Economic ResearchCentral Bank of the Republic of TurkeyAnkaraTurkey

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