Estimating open economy Phillips curves for the euro area with directly measured expectations

TLDR: In this article, the authors examined euro-area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods, and they found that the hybrid specification of the NMPs is needed in order to properly capture the euro area inflation process.

Abstract: This paper examines euro-area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro-area inflation dynamics are captured better by the open economy specification. Moreover, in the open economy context, even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to properly capture the euro-area inflation process.