JEL classification: C23 C52 E12 E31 Keywords: European and US inflationThe new Keynesian Phillips curve Exact and inexact rational expectations Vector autoregressive models Likelihood based methods a b s t r a c t Several authors have questioned the evidence claimed by Galí and Gertler (1999) and Galí et al. (2001) that a hybrid version of the new Keynesian Phillips curve approximates European and US inflation dynamics quite well. We re-examine the evidence using the vector autoregressive framework and likelihood based methods, paying particular attention to the stationary and nonstationary, and possibly cointegrated, nature of variables involved. Our results show that the exact as well as the inexact form of the hybrid NKPC are clearly at odds with the European data. On the other hand, Galí and Gertler (1999) finding that the inexact hybrid NKPC is a ''good first approximation'' to the US inflation dynamics seems less at odds with the data. However, the assumption of the model that the stochastic term forms a sequence of innovations may be problematic as we find indication of autocorrelation in the estimated residuals. The exact form of the hybrid NKPC is firmly rejected by the US data.

Abstract:During the last decades Norwegian exporters have − despite various forms of exchange rate targeting − faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated VAR framework using the implied conditional variance from a GARCH model as a measure of volatility. Although treating the volatility measure as either a stationary or a non-stationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth − in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.

Expectations, Export prices, LQAC-model, VAR model, EqCM-model, Lucas critique, C51, C52, D84, E31,

Abstract:Several small open economies switched to inflation targeting during the 1990s, thereby giving up various forms of exchange rate targeting in favour of flexible exchange rates. Norway did the same early in 2001, and has thereafter experienced highly varying nominal exchange rates with consumer price inflation dropping far below the target during 2003 and 2004. Knowledge of the degree of exchange rate pass-through to import prices and further to consumer prices is essential for inflation targeting. The literature suggests that pass-through is greater to import prices than to consumer prices, which presumably is related to the role of distributors in the economy. We present empirical evidence on these issues for Norway by estimating import price equations and a dynamic model of the distributors pricing behaviour. Using a large-scale macroeconometric model of the Norwegian economy, we find exchange rate pass-through to import prices to be quite rapid in the short run, while pass-through to consumer prices seems to be modest. We show that, among the numerous channels through which the exchange rate operate, trade margins in the distribution sector act as cushions to exchange rate fluctuations, thereby being one of the main important source for the delay in pass-through. In spite of moderate pass-through to consumer prices, we find inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks.

We evaluate the empirical performance of forward‐looking models for inflation dynamics in a small open economy. Using likelihood‐based testing procedures, we find that the exact formulation is at odds with Norwegian data. Moreover, some of the parameters in the model are not well identified. We also find that the inexact formulation is not rejected statistically using a test based on a minimum distance method. However, confidence regions also reveal an identification problem with this model. Instead, we find a well‐specified backward‐looking model with imperfect competition underlying the price setting, which is a model that outperforms an alternative forward‐looking model in‐sample. The backward‐looking model also forecasts somewhat better than the alternative forward‐looking model, during and after the recent financial crisis.