Estimating Open Economy New Keynesian Phillips Curve for Korea

Abstract

We estimate the open economy new Keynesian Philips curve (NKPC) to characterize the inflation dynamics of Korea. While recent studies show that the NKPC holds for the pre-currency crisis period, the empirical evidence is inconclusive for the post-crisis period. Has globalization increased the role of global factors relative to domestic factors? Can labor income share still serve as a good measure of real marginal cost following the structural break? To address these issues for the post-crisis period, we use two types of open NKPC: the relative prices model and the incomplete pass-through model. The estimation of both models indicates that the forward-looking behavior is important, and its role is reinforced in an open economy specification. Both NKPC models also show that the external factors are more relevant inflation drivers than the domestic factors.