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A Microfounded Sectoral Model for Open Economies

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  • Jorge Fornero
  • Tomasz Michalak
  • Joseph Plasmans

Abstract

In this paper we derive a microfounded macro New Keynesian model for open economies, be them large or small. We consider habit formation in consumption, sectoral linkages for tradable and non-tradable goods, capital stock investments with variable capital utilization, domestic and foreign governments, imperfect (exchange rate) pass-through in import prices and incomplete international financial markets. Sticky nominal prices and wages are modeled in Calvo and Taylor staggered ways. The model economy is composed of a continuum of infinitely-lived consumers and producers of final and intermediate goods. We provide a very general log-linearization method, from which we can easily obtain various special cases, as trend inflation or steady-state log-linearizations.Numerical simulations of the two-country sectoral model are provided for a relatively large number of structural shocks as domestic and foreign productivity shocks in final tradables and non-tradables, money demand shocks and a shock in the exchange rate. Such a model is well suited for monetary policy analysis at the international level and risk analysis.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2052.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2052

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Keywords: New Keynesian open economy model; tradable and non-tradable sectors; final and intermediate goods; log-linearization;

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Cited by:
  1. Bas, Maria & Ledezma, Ivan, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," Economics Papers from University Paris Dauphine 123456789/6913, Paris Dauphine University.
  2. Jorge A. Fornero, 2010. "Ricardian Equivalence Proposition in a NK DSGE Model for two Large Economies: The EU and the US," Working Papers Central Bank of Chile, Central Bank of Chile 563, Central Bank of Chile.

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