Christiano, Lawrence J. () (Department of Economics) Trabandt, Mathias () (Research Department, Central Bank of Sweden) Walentin, Karl () (Research Department, Central Bank of Sweden)
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How important are financial and labor market frictions for the business cycle dynamics of a small open economy? In order to address this question we extend the small open economy model presented in Adolfson, Laséen, Lindé and Villani (2005, 2007a, 2007b) in three important dimensions. First, we introduce the feature that exports are produced by using imported goods in addition to domestically produced goods. Second, we incorporate financial frictions in the accumulation and management of capital similar to Bernanke, Gertler and Gilchrist (1999) and Christiano, Motto and Rostagno (2003, 2007). Third, we include the search and matching framework of Mortensen and Pissarides (1994), Gertler, Sala and Trigari (2006) and Christiano, Ilut, Motto, and Rostagno (2007) into a small open economy model. As a first step, we calibrate the model and analyze the effects of a monetary tightening. It turns out that the introduction of financial and labor market frictions allow for additional interesting insights about the effects of monetary policy.
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number
214.
Find related papers by JEL classification: E00 - Macroeconomics and Monetary Economics - - General - - - General E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data) F00 - International Economics - - General - - - General F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General G00 - Financial Economics - - General - - - General G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General
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