Alternative Monetary Regimes in a DSGE Model of a Small Open Economy with Two Sectors and Sticky Prices and Wages
AbstractThis paper develops a dynamic stochastic general equilibrium(DSGE) model for a small open economy (SOE) that can be calibrated to simulate the macro dynamics of a semi-industrialized developing country like Argentina. We consider a multilateral non-commodity trade environment, with the U.S.A. and Europe as trade partners, and assume that the Law of One Price does not hold for the goods that the U.S.A. and Europe trade between them. We show that this makes the U.S.A.´s multilateral real exchange rate (MRER) a key fundamental for the SOE´s MRER, in addition to its terms of trade. The SOE produces and consumes exportable and non tradable goods using labor (and in the case of exportables, imports). There is a representative, perfectly competitive firm producing exportables and operating under perfectly flexible export and import prices. Monopolistic competition with price (wage) stickiness prevails for non-tradable firms (households). These set prices (wages) subject to a price/wage adjustment cost function. There coexist both forward and backward looking firms. The latter use a "rule of thumb" to change prices that gradually corrects their price to that of optimizing firms. Alternative monetary or foreign exchange policy rules, including a fixed exchange rate, inflation targeting under a pure float and inflation targeting under a managed float, complete the dynamic systems. The non-stochastic steady state is analyzed in detail for the alternative models and the log-linearized systems are obtained.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 200612.
Length: 52 pages
Date of creation: Jul 2006
Date of revision:
DSGE models; exchange rate policy; monetary policy; small open economy; sticky prices and wages;
Other versions of this item:
- Guillermo J. Escudé, 2007. "Alternative Monetary Regimes in a DSGE Model of a Small Open Economy with Two Sectors and Sticky Prices and Wages," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(49), pages 65-138, October -.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F31 - International Economics - - International Finance - - - Foreign Exchange
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.:
- Sebastion Edwards, 1988.
"Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries,"
UCLA Economics Working Papers
506, UCLA Department of Economics.
- Edwards, Sebastian, 1988. "Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries," Journal of Development Economics, Elsevier, vol. 29(3), pages 311-341, November.
- Sebastian Edwards, 1990. "Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence From Developing Countries," NBER Working Papers 2721, National Bureau of Economic Research, Inc.
- Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Frank Smets & Raf Wouters, 2002.
"An estimated dynamic stochastic general equilibrium model of the euro area,"
Working Paper Research
35, National Bank of Belgium.
- Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
- Pierpaolo Benigno & Michael Woodford, 2005.
"Optimal stabilization policy when wages and prices are sticky: the case of a distorted steady state,"
Board of Governors of the Federal Reserve System (U.S.), pages 127-180.
- Pierpaolo Benigno & Michael Woodford, 2004. "Optimal stabilization policy when wages and prices are sticky: The case of a distorted steady state," Discussion Papers 0405-03, Columbia University, Department of Economics.
- Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal Stabilization Policy When Wages and Prices are Sticky: The Case of a Distorted Steady State," CEPR Discussion Papers 4740, C.E.P.R. Discussion Papers.
- Pierpaolo Benigno & Michael Woodford, 2004. "Optimal Stabilization Policy When Wages and Prices are Sticky: The Case of a Distorted Steady State," NBER Working Papers 10839, National Bureau of Economic Research, Inc.
- Barry Eichengreen & Ricardo Hausmann, 1999.
"Exchange rates and financial fragility,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, pages 329-368.
- Agenor, P.-R., 1997. "Capital-Market Imperfections and the Macroeconomic Dynamics of Small Indebted Economies," Princeton Studies in International Economics 82, International Economics Section, Departement of Economics Princeton University,.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
- Jordi Gali & Tommaso Monacelli, 2002.
"Monetary Policy and Exchange Rate Volatility in a Small Open Economy,"
NBER Working Papers
8905, National Bureau of Economic Research, Inc.
- Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
- Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
- Jeffery D. Amato, 2005. "The role of the natural rate of interest in monetary policy," BIS Working Papers 171, Bank for International Settlements.
- Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Federico Grillo).
If references are entirely missing, you can add them using this form.