Open Economies Review

, Volume 22, Issue 2, pp 317–337 | Cite as

The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics

  • Alexander Mihailov
  • Fabio Rumler
  • Johann Scharler
Research Article


In this paper we apply GMM estimation to assess the relevance of domestic versus external determinants of CPI inflation dynamics in a sample of OECD countries typically classified as open economies. The analysis is based on a variant of the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (Rev Econ Stud 72:707–734, 2005), where the novel feature is that expectations about fluctuations in the terms of trade enter explicitly. For most countries in our sample the expected relative change in the terms of trade emerges as the more relevant inflation driver than the contemporaneous domestic output gap.


New Keynesian Phillips Curve Small open economies Expected terms of trade fluctuations Inflation dynamics GMM estimation 

JEL Classifications

C32 C52 E31 F41 



We would like to thank an anonymous referee, the Managing Editor George Tavlas, Kerry Patterson and the audiences at the 2nd International Conference on Small Open Economies in a Globalized World, Wilfrid Laurier University, Waterloo, Ontario, Canada (June 2008) and the 26th GdRE International Symposium on Money, Banking and Finance, Université d’Orléans, Orléans, France (June 2009) for helpful comments. The usual disclaimer applies.


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Alexander Mihailov
    • 1
  • Fabio Rumler
    • 2
  • Johann Scharler
    • 3
  1. 1.School of EconomicsUniversity of ReadingReadingUnited Kingdom
  2. 2.Economic Analysis DivisionOesterreichische NationalbankViennaAustria
  3. 3.Department of EconomicsUniversity of LinzLinzAustria

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