Internationalised Production in a Small Open Economy
AbstractWe show that internationalised production, modelled as trade in intermediate goods, brings the dynamics of a small open economy closer to that observed in the data. We build a stylized new-Keynesian small open economy model and we show that when production is internationalised, movements of international relative prices affect the economy through an additional channel, denoted as the “cost channel”. Both qualitatively and quantitatively, this channel (i) increases the share of output variance explained by foreign shocks, consistent with empirical evidence, (ii) implies that the exchange rate pass-through is closer to estimated values, and (iii) increases the international correlation of output relative to that of consumption.
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Bibliographic InfoPaper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/03.
Length: 30 p
Date of creation: Apr 2010
Date of revision:
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-28 (All new papers)
- NEP-CBA-2010-08-28 (Central Banking)
- NEP-INT-2010-08-28 (International Trade)
- NEP-MAC-2010-08-28 (Macroeconomics)
- NEP-OPM-2010-08-28 (Open Economy Macroeconomic)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Hummels & Jun Ishii & Kei-Mu Yi, 1999.
"The nature and growth of vertical specialization in world trade,"
72, Federal Reserve Bank of New York.
- Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
- Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers 1130, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
- Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers halshs-00646601, HAL.
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