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Prepared by Dora Iakova. A more detailed version of this paper is forthcoming as an IMF Working Paper.
(Borio and Filardo, 2006), and (Mody and Ohnsorge, 2006) provide empirical cross-country evidence for globalization-related flattening of the Phillips curve. Over the last few months, the issue has come up in numerous speeches by monetary policymakers, including Charles Bean, Donald Kohn (Boston Fed Governor), and Lucas Papademos (ECB Vice President).
The absolute magnitude of the coefficients depends on the weight attached to interest rate variability in the loss function. Higher weight attached to interest rate variability produces lower coefficients. Therefore the fact that the coefficients shown are greater in magnitude than the typical coefficients used in practice is of no particular significance.
The central bank is assumed to have greater dislike for inflation variability relative to output gap variability in the illustrated scenario (the ratio λπ/λу is 3).