Is it possible to use the local physical keyboard of your development machine when using the Windows Phone emulator?
Yes it is possible and is activated by using a shortcut:
To enable the keyboard in the emulator press the PAGE UP key or press the PAUSE/BREAK key.
To disable the keyboard in the emulator press the PAGE DOWN key or press the PAUSE/BREAK key.
Furthermore you there are a lot of different key mappings between your development machine keyboard and the phone functions. You can check the whole list in the Windows Phone Emulator MSDN documentation.