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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, October.
    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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    Citations

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    Cited by:
    1. Sánchez, Marcelo, 2010. "Wage restraint and monetary union," Economic Modelling, Elsevier, vol. 27(1), pages 134-142, January.
    2. Frederic S. Mishkin, 2008. "Globalization, macroeconomic performance, and monetary policy," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    3. Marcelo Sánchez, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    4. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers 897, Board of Governors of the Federal Reserve System (U.S.).
    5. Livio Stracca, 2010. "Is the new keynesian IS curve structural?," Working Paper Series 1236, European Central Bank.
    6. Marcelo Sánchez, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank.
    7. 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.

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