The New Keynesian Phillips Curve in a Small, Open Economy: Specification, Structural Breaks, and Robustness

This paper empirically assesses whether the slope of the Phillips curve with respect to the output gap has declined. A version of the New Keynesian Phillips curve for a small, open economy (Galí and Monacelli, 2005) is derived and augmented with lags to specify a semistructural estimation equation. Using data for the Peruvian economy, this equation is estimated using the Generalized Method of Moments (GMM) for the period covering the explicit inflation targeting regime (January 2002–March 2019) and the period following the Great Global Financial Crisis (January 2008–March 2019). The analysis finds that the slope parameter has remained stable for both estimation periods. Furthermore, the expectations channel has become more significant in the post-crisis period, a result consistent with the lower persistence of inflation dynamics. The results are also consistent with the presence of long-run nominal homogeneity in both estimation samples.