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The Liquidity Effect in a Small Open Economy Model

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  • Javier Andrés
  • J. David López-Salido
  • Javier Vallés

Abstract

In this paper we construct a dynamic stochastic general equilibrium model for a small open economy allowing for perfect capital mobility. The model incorporates price rigidities in monopolistically competitive goods and labor markets and real rigidities in the form of capital adjustment costs. The model matches some nominal and real business cycle features observed in European economies and produces a significant output response to monetary policy shocks.

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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 9902.

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Length: 45 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bde:wpaper:9902

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Keywords: GENERAL EQUILIBRIUM ; STOCHASTIC MODELS ; MACROECONOMICS;

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References

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  1. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 114, Board of Governors of the Federal Reserve System (U.S.).
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1151-1180, September.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report, Federal Reserve Bank of Minneapolis 227, Federal Reserve Bank of Minneapolis.
  4. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9614, Universite de Montreal, Departement de sciences economiques.
  5. Paul Bergin & Michael Magill & Kristin Van Gaasback, 2003. "Monetary Policy, Investment Dynamics, And The Intertemporal Approach To The Current Account," Working Papers, University of California, Davis, Department of Economics 9713, University of California, Davis, Department of Economics.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  8. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
  9. Jinill Kim, 1998. "Monetary policy in a stochastic equilibrium model with real and nominal rigidities," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-02, Board of Governors of the Federal Reserve System (U.S.).
  10. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 32(3-4), pages 339-352, May.
  12. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  13. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  14. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  15. Hairault, Jean-Olivier & Portier, Franck, 1993. "Money, New-Keynesian macroeconomics and the business cycle," European Economic Review, Elsevier, Elsevier, vol. 37(8), pages 1533-1568, December.
  16. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
  17. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper, Federal Reserve Bank of Richmond 98-05, Federal Reserve Bank of Richmond.
  18. Paul R. Bergin, . "Monetary Policy, Investment Dynamics, And The Intertemporal Approach To The Current Account," Department of Economics, California Davis - Department of Economics 97-13, California Davis - Department of Economics.
  19. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(3), pages 299-316, June.
  20. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 235-269, February.
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Cited by:
  1. Eduardo L. Giménez & José María Martín-Moreno, . "Title: Monetary shocks and business cicle in the Spanish economy," Studies on the Spanish Economy, FEDEA 43, FEDEA.

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