TRADE OPENNESS AND THE PHILLIPS CURVE: EVIDENCE FROM ASEAN COUNTRIES

Abstract

A flattening of the Phillips curve in recent decades has attracted a considerable interest of researchers and central bankers. As trade openness might be among the main causes of this phenomenon, this study puts forward a testable ‘openness–Phillips curve’ hypothesis. Two methods — a static and a dynamic approaches — were employed to test the hypothesis by estimating slope coefficients of the new Keynesian Phillips curve (NKPC) and hybrid NKPC in ten ASEAN countries. A notable empirical finding is that in the periods of a higher trade openness, the Phillips curve tended to be flatter in the close economies and steeper in the open economies. These findings have some economic and political implications. The main one is that central banks in the ASEAN countries where the flattening of the Phillips curve takes place would not be able to employ the Phillips curve as an effective policy tool. Besides, countries with high inflation and unemployment rates could face some political uncertainty.