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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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File URL: http://dallasfed.org/assets/documents/institute/wpapers/2010/0061.pdf
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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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  1. Luis Opazo, 2006. "The Backus-Smith Puzzle: The Role of Expectations," Working Papers Central Bank of Chile 395, Central Bank of Chile.
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Cited by:
  1. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk-sharing puzzle is at business-cycle and lower frequency," Banco de España Working Papers 1212, Banco de España.
  2. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 403 - 466.
  3. Masashige Hamano, 2013. "The consumption-real exchange rate anomaly with extensive margins," CREA Discussion Paper Series 13-01, Center for Research in Economic Analysis, University of Luxembourg.
  4. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do mood swings drive business cycles and is it rational?," Globalization and Monetary Policy Institute Working Paper 98, Federal Reserve Bank of Dallas.

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