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Understanding the effect of productivity changes on international relative prices: the role of news shocks

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  • Deokwoo Nam
  • Jian Wang

Abstract

The terms of trade and the real exchange rate of the US appreciate when the US labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home prices relative to foreign prices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 61.

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Date of creation: 2010
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Handle: RePEc:fip:feddgw:61

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Keywords: Business cycles - Econometric models ; International finance ; International trade - Econometric models ; Labor productivity;

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Cited by:
  1. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2011. "Traded and Nontraded Goods Prices, and International Risk Sharing: an Empirical Investigation," NBER Working Papers 17501, National Bureau of Economic Research, Inc.
  2. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
  3. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk-sharing puzzle is at business-cycle and lower frequency," Banco de Espa�a Working Papers 1212, Banco de Espa�a.
  4. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
  5. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do Mood Swings Drive Business Cycles and is it Rational?," NBER Working Papers 17651, National Bureau of Economic Research, Inc.

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