DP3582 | The Open Economy Phillips Curve: 'New Keynesian' Theory and Evidence

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The Paper derives an open economy New-Keynesian Phillips curve. The Phillips curve depends on growth in the domestic economy excess capacity, differential growth between foreign output and domestic output, and on the surprise depreciation of the real exchange rate. The Paper provides new evidence on the effect of globalization of the economy, in both the trade and capital transactions, in the Phillips curve. The evidence is consistent with the predictions of the theory.