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Browsing Documentos de Trabajo by Subject "B4-Economic Methodology"
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- Dinámica inflacionaria y la nueva curva de Phillips Neokeynesiana en Costa RicaThis paper reviews the historic evolution of the literature on the Phillips Curve, highlighting the significant changes experienced over time, and estimates a New Keynesian Phillips Curve (NKPC) specification for Costa Rica using quarterly data over the period 1989-2002. Our literature review reveals an on going debate in relation with the existence of a Phillips Curve. The empirical evidence gathered in this document proves the applicability of the NKPC specification for Costa Rica. Our estimates show that the Phillips Curve is relatively elastic in the short run, indicating that expansive monetary policies can stimulate output growth in the short run at the cost of higher inflation and a sub-optimal monetary policy. But, in the long run, the NKPC is perfectly inelastic, leaving almost no space for such dynamically inconsistent policies, since they would prove ineffective in terms of output and absolutely inflationary according to the “Inflation Accelerator Principle”. An implication of the large effect that devaluation has (according to our estimates) on inflationary expectations, is that setting the exchange rate peg at a level consistent with inflationary targets is a fast and effective way of controlling inflation. Hence, assuming some slack in the international monetary reserves level and the current account deficit, reducing the devaluation rate is a viable option to reduce inflation in the short run, ceteris paribus, even if this implies pressures on the current account and eventual losses in monetary reserves.