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New Directions for Stochastic Open Economy Models

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  • Maurice Obstfeld
  • Kenneth Rogoff

Abstract

The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Despite the potential interplay between imperfections due to sticky wages and monopoly, the optimal monetary policy rule has a closed-form solution. To motivate our model, we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local-currency pricing.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7313.

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Date of creation: Aug 1999
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Publication status: published as Journal of International Economics, Vol. 50, no. 1 (February 2000): 117-153
Handle: RePEc:nbr:nberwo:7313

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