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American Economic Journal: Macroeconomics: Vol. 2 No. 4 (October 2010)

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International Competition and Inflation: A New Keynesian Perspective

Article Citation

Guerrieri, Luca, Christopher Gust, and J. David López-Salido. 2010. "International Competition and Inflation: A New Keynesian Perspective." American Economic Journal: Macroeconomics, 2(4): 247-80.

DOI: 10.1257/mac.2.4.247

Abstract

We develop and estimate an open economy New Keynesian Phillips Curve (NKPC) in which variable demand elasticities give rise to movements in desired markups in response to changes in competitive pressure from abroad. A parametric restriction yields the standard NKPC under constant elasticity and no role for foreign competition to influence domestic inflation. Foreign competition plays an important role in accounting for the behavior of traded goods price inflation. Foreign competition accounted for more than half of a 4 percentage point decline in domestic goods price inflation in the 1990s. Our results also provide evidence against demand curves with a constant elasticity. (JEL E12, E22, E31, F14, F41)

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Authors

Guerrieri, Luca (Federal Reserve Board)
Gust, Christopher (Federal Reserve Board)
López-Salido, J. David (Federal Reserve Board)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E22: Capital; Investment; Capacity
E31: Price Level; Inflation; Deflation
F14: Country and Industry Studies of Trade
F41: Open Economy Macroeconomics

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