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The Transmission of Domestic Shocks in Open Economies

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Author Info
Erceg, Christopher
Gust, Christopher
López-Salido, J David

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Abstract

This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6574.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6574

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Related research
Keywords: imported intermediate inputs; open economy Phillips Curve; variable markups;

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Find related papers by JEL classification:
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
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation

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References listed on IDEAS
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Full references

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. Marcelo Sánchez, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank. [Downloadable!]
  2. Frederic S. Mishkin, 2008. "Globalization, Macroeconomic Performance, and Monetary Policy," NBER Working Papers 13948, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers 897, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Marcelo Sánchez, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank. [Downloadable!]
  5. Adamcik, Santiago, 2008. "Efectos de la Globalizacion sobre la Inflacion y la politica Monetaria Domestica
    [Globalization Effect on both Inflation and Domestic Monetary Policy]    ," MPRA Paper 9242, University Library of Munich, Germany. [Downloadable!]
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