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Is there an exchange rate channel in the forward-looking Phillips curve? A theoretical and empirical investigation

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  • Alfred Guender
  • Yu Xie

Abstract

This paper shows how the exchange rate affects the price-setting behavior of monopolistically competitive firms in the sticky price framework that gives rise to a forward-looking Phillips Curve at the aggregate level. The open economy Phillips Curve differs from its closed economy counterpart in that the real exchange rate exerts a direct effect on domestic inflation. The exchange rate channel in the Phillips Curve is pivotal in determining the optimal policy setting in an open economy. On balance, we find only scant empirical evidence for the existence of a direct exchange rate channel in the Phillips Curve in a sample of six OECD countries. Indeed, the forward-looking Phillips Curve does not receive much backing from the data.

Suggested Citation

  • Alfred Guender & Yu Xie, 2007. "Is there an exchange rate channel in the forward-looking Phillips curve? A theoretical and empirical investigation," New Zealand Economic Papers, Taylor & Francis Journals, vol. 41(1), pages 5-28.
    • Handle: RePEc:taf:nzecpp:v:41:y:2007:i:1:p:5-28
    DOI: 10.1080/00779950709558497
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    Cited by:

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    2. Froyen, Richard T. & Guender, Alfred V., 2018. "The real exchange rate in Taylor rules: A Re-Assessment," Economic Modelling, Elsevier, vol. 73(C), pages 140-151.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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