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

This paper extends the new hybrid Keynesian Phillips curve (NKPC) to the open economy context. We hypothesise that pricing decisions depend on both labour costs and intermediate imported input prices. The results for Hong Kong are consistent with the theory if import prices are given substantial weight in measuring marginal cost, rejecting the labour costs model. We find that forward-looking behaviour is dominant, and that price stickiness is smaller in Hong Kong than in the USA. The results are sensitive to the choice of instruments, and a model using the output gap instead of marginal cost as the forcing variable also performs well.