An Open Economy New Keynesian Phillips Curve: Evidence from Hong Kong

This paper extends Galí and Gertler’s (1999) new hybrid KeynesianPhillips curve to the open economy context. We hypothesise that pricing decisionsdepend on both labour costs and intermediate imported input prices. The results forHong Kong are consistent with the theory if import prices are given substantial weightin measuring marginal cost, rejecting the labour costs model. The model using theoutput gap yields relatively precise estimates, however. We find that backward-looking behaviour is dominant, and that price stickiness is smaller in Hong Kong thanin the USA. The results are sensitive to the choice of instruments and sample.