DP3083 | The 'New Keynesian' Phillips Curve: Closed Economy versus Open Economy

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The Paper extends Woodford?s (2000) analysis of the closed economy Phillips curve to an open economy with both commodity trade and capital mobility. We show that consumption smoothing, which comes with the opening of the capital market, raises the degree of strategic complementarity among monopolistic competitive suppliers, thus rendering prices more sticky and magnifying output responses to nominal GDP shocks.