We study the effects of news about future total factor productivity (TFP) in a small open economy. We show that an open-economy version of the neoclassical model produces a recession in response to good news about future TFP. We propose an open-economy model that generates comovement in response to TFP news. The key elements of our model are a weak short-run wealth effect on the labor supply and adjustment costs to labor and investment. We show that our model also generates comovement in response to news about future investment-specific technical change and to "sudden stops." Copyright (c) 2008 The Ohio State University.
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Volume (Year): 40 (2008) Issue (Month): 8 (December) Pages: 1699-1711 Download reference. The following formats are available: HTML
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2005.
"Sudden stops and output drops,"
Staff Report
353, Federal Reserve Bank of Minneapolis.
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