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Endogenously persistent output dynamics: A puzzle for the sticky-price model?

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Author Info
Fabio Ghironi () (Boston College)

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Abstract

I show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once openness of the economy is taken into account. I make this point using a two-country, monetary model of macroeconomic interdependence under internationally incomplete asset markets with stationary net foreign asset dynamics. If asset markets are incomplete, price stickiness generates endogenous persistence in the cross-country GDP differential by introducing persistence in the dynamics of the relative price differential between the two economies. This results in the dependence of the current real GDP differential on its past value, as well as on the stock of net foreign assets accumulated in the previous period. The elasticity of the current GDP differential to its past value is sizable for standard parameter values, implying a quantitatively significant persistence effect through this channel. Endogenous persistence yields hump-shaped responses of GDP to productivity and monetary policy shocks.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 527.

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Length: 30 pages
Date of creation: 14 Mar 2002
Date of revision:
Handle: RePEc:boc:bocoec:527

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Related research
Keywords: dynamics; incomplete markets; persistence; open economy; sticky prices;

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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Cited by:
(explanations, 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.)

  1. Karen Dury & Özlem Oomen, . "The real exchange rate and quality improvements," Bank of England working papers 320, Bank of England. [Downloadable!]
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