Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve

Ayşe Kabukçuoğlu Dur and Enrique Martínez García ()

No 392, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically the performance of open-economy Phillips-curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.

Keywords: Open-Economy New Keynesian Model; Global Liquidity; New Open-Economy Phillips Curve; Forecasting; Global Slack (search for similar items in EconPapers)
JEL-codes: C53 F41 F44 F47 F62 (search for similar items in EconPapers)
Pages: 40
Date: 2020-06-26
New Economics Papers: this item is included in nep-mon
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https://www.dallasfed.org/-/media/documents/institute/wpapers/2020/0392a.pdf Appendix (application/pdf)
https://www.dallasfed.org/~/media/documents/institute/wpapers/2020/0392.pdf Working paper (application/pdf)

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Journal Article: Mind the gap!—A monetarist view of the open-economy Phillips curve (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:88321

DOI: 10.24149/gwp392

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