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Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects"

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  • Ippei Fujiwara

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp))

  • Naohisa Hirakata

    (Financial Systems and Bank Examination Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

Abstract

In this paper, we first set up a model that incorporates firm dynamics into the Global Economy Model (henceforth, GEM) developed by the IMF Research Department. Then, we show how the economic variables respond to the shocks that shift the production frontier outwards, namely productivity gains in manufacturing, efficiency gains in creating new firms, and an increase in the labor force. Contrary to the model used in previous research on the same topic by Corsetti, Martin and Pesenti (2007, henceforth, CMP), our model contains rich and realistic dynamics embedded in the GEM such as a time-to-build constraint for firm dynamics, and nominal price and wage stickiness. We show that (1) the analytical results of CMP are dependent on the elasticity of substitution between domestic and foreign goods, (2) short-run responses could be different from those in CMP because of the existence of price and wage stickiness, and (3) persistence of shocks also alters the direction of responses via the wealth effect. These results suggest that it is of great importance for policy institutions to acknowledge the dynamic aspects of productivity spillovers by simulating a model with richer dynamics like the GEM.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 07-E-07.

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Date of creation: Jun 2007
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Handle: RePEc:ime:imedps:07-e-07

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Keywords: New Keynesian Model; Monetary Policy; Transparency; Productivity Growth; Learning;

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  1. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  2. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
  3. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
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