Estimated new Keynesian Phillips curve in Lithuania

Abstract

The paper provides estimates for the New Keynesian Phillips curve (NKPC) in Lithuania. The paper considers the baseline NKPC and the hybrid NKPC, the latter accounts for inflation inertia. The analysis covers estimates for the closed economy case and the open economy extension. The estimates highlight the importance of the expected and the lagged inflation in the formation of inflation. The role of the real marginal cost is found to be limited in shaping the dynamics of inflation. The paper provides estimates for the structural parameters underlying the price setting in Lithuania. Estimates show that the implied price duration stands below the one reported for the euro area and the US. The evidence on the fraction of firms that adjust prices in a backward looking way is less conclusive.