Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries ∗ †

In this paper an open economy model of the New Keynesian Phillips Curve incorporating three different factors of production, domestic labor and imported as well as domestically produced intermediate goods, is developed and estimated for 9 euro area countries and the euro area aggregate. This general model nests existing closed economy and open economy models as special cases. We find that structural price rigidity is systematically lower in the open economy specification of the model than in the closed economy specification indicating that when firms face more variable input costs they tend to adjust their prices more frequently. However, when the model is estimated in its general specification including also domestic intermediate inputs, price rigidity increases again compared to the open economy specification without domestic intermediate inputs. ∗This paper has been written in the context of the Eurosystem Inflation Persistence Network (IPN). †I would like to thank Jordi Gali, Lars Sondergaard and the participants in the Eurosystem Inflation Persistence Network and in particular Hans Scharler for valuable comments and discussions. The views expressed in this paper are those of the author and do not commit in any way the Oesterreichische Nationalbank or the ECB. All errors are my own responsibility. ‡Oesterreichische Nationalbank, Economic Analysis Division, Otto Wagner Platz 3, A-1090 Vienna, Austria, E-Mail: [email protected].