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Propagation of Nominal Shocks in Open Economies

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Author Info
Torben M. Andersen
Niels C. Beier () (Department of Economics, University of Aarhus, Denmark)
Abstract

The propagation of nominal shocks is analyzed in a fully specified stochastic intertemporal two-country model. We show how to solve for the equilibrium analytically and analyze the role of real and nominal propagation mechanisms. First we consider the dynamic implications of nominal shocks having an impact effect due to one-period nominal contracts when the propagation over time runs via a basic real propagation mechanism in open economies (current account). We find that this case is characterized by strong persistency in the real effects of nominal shocks, but the dynamic adjustment path is strongly at odds with empirical evidence. Secondly, we introduce a nominal propagation mechanism in the form of staggered nominal contracts. This turns out to imply a radical change in the dynamic response to nominal shocks, and to generate a dynamic adjustment path of the form observed empirically.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 1999-10.

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Handle: RePEc:aah:aarhec:1999-10

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Related research
Keywords: Persistence staggering exchange rates nominal shocks current account

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Sarajevs, Vadims, 2000. "Money Shocks in a Small Open Economy with Dollarization, Factor Price Rigidities, and Nontradeables," BOFIT Discussion Papers 12/2000, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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