Inflation Dynamics in a Small Open Economy
Journal article, Peer reviewed
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OriginalversjonBoug, P. , Cappelen, Å. and Swensen, A. R. (2017), Inflation Dynamics in a Small Open Economy. Scandinavian Journal of Economics, 119(4): 1010-1039. doi:10.1111/sjoe.12194 https://doi.org/10.1111/sjoe.12194
We evaluate the empirical performance of forward-looking models for inflation dynamicsin a small open economy. Using likelihood-based testing procedures, we find that the exactformulation is at odds with Norwegian data. Moreover, some of the parameters in themodel are not well identified. We also find that the inexact formulation is not rejectedstatistically using a test based on a minimum distance method. However, confidence regionsalso reveal an identification problem with this model. Instead, we find a well-specifiedbackward-looking model with imperfect competition underlying the price setting, which isa model that outperforms an alternative forward-looking model in-sample. The backward-looking model also forecasts somewhat better than the alternative forward-looking model,during and after the recent financial crisis. Keywords: Backward-looking; cointegrated vector autoregressive models; equilibrium correc-tion models; forward-looking; likelihood-based methods; minimum distance method
"This is the peer reviewed version of the following article: [Boug, P, Cappelen, Å. & Swensen, A. R. (2017). Inflation dynamics in a small open economy. Scandinavian Journal of Economics, 119 (4), 1010-1039, which has been published in final form at https://doi.org/10.1111/sjoe.12194. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions."