Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76275
Authors: 
Leith, Campbell
Malley, Jim
Year of Publication: 
2003
Series/Report no.: 
CESifo Working Paper 834
Abstract: 
In this paper we develop an open economy model of firms' pricing behaviour under imperfect competition. This allows us to introduce various terms of trade effects influencing the firm's pricing decision, in addition to labour costs which dominate most closed-economy specifications of the New Keynesian Phillips (NKPC) curve. Our analysis gives rise to a hybrid open economy NKPC which nests existing closed and open economy specifications adopted in empirical work. We estimate this specification for the G7 economies and find that the US, UK and Canada typically enjoy less inertia in price setting than the European G7 economies and Japan and that these estimates are both plausible and in line with survey evidence. We also find that the proportion of firms which use simple backward-looking rules of thumb in price setting is greater when the frequency of price change is smaller. Finally there is evidence of significant asymmetries in price setting amongst EMU members.
JEL: 
E30
Document Type: 
Working Paper

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