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The Transmission of Domestic Shocks in Open Economies

In: International Dimensions of Monetary Policy

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  • Christopher Erceg
  • Christopher Gust
  • David López-Salido

Abstract

This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.

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This chapter was published in:

  • Jordi Galí­ & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, Ekim.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0511.

    Handle: RePEc:nbr:nberch:0511

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    2. Michael Woodford, 2007. "Globalization and Monetary Control," NBER Chapters, in: International Dimensions of Monetary Policy, pages 13-77 National Bureau of Economic Research, Inc.
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    6. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
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    Citations

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    Cited by:
    1. Frederic S. Mishkin, 2009. "Globalization, Macroeconomic Performance, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(s1), pages 187-196, 02.
    2. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 0927, European Central Bank.
    3. Adamcik, Santiago, 2008. "Efectos de la Globalizacion sobre la Inflacion y la politica Monetaria Domestica
      [Globalization Effect on both Inflation and Domestic Monetary Policy]
      ," MPRA Paper 9242, University Library of Munich, Germany.
    4. Sánchez, Marcelo, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank.
    5. Sánchez, Marcelo, 2010. "Wage restraint and monetary union," Economic Modelling, Elsevier, vol. 27(1), pages 134-142, January.
    6. Dao, Mai Chi, 2013. "Foreign labor costs and domestic employment: What are the spillovers?," Journal of International Economics, Elsevier, vol. 89(1), pages 154-171.
    7. Stracca, Livio, 2010. "Is the New Keynesian IS curve structural?," Working Paper Series 1236, European Central Bank.
    8. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 897, Board of Governors of the Federal Reserve System (U.S.).
    9. Alpaslan AKÇORAOĞLU, 2012. "Yeni Açık Ekonomi Makroiktisat Teorisi ve Para Politikasının Uluslararası Boyutları," Ekonomik Yaklasim, Ekonomik Yaklasim Association, vol. 23(85), pages 57-82.

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