Can New Open Economy Macroeconomic Models Explain Business Cycle Facts?
AbstractWe assess the ability of new open economy models to match OECD business cycle data. We adopt a canonical new open economy model with varying degrees of nominal inertia, monopolistic competition and distribution costs and assess the contribution of each facet of this model to help explain jointly the volatility and persistence of real exchange rates and the dynamics of the current account. Building on Chari, Kehoe and McGrattan (2002) and Schmitt-Grohe and Uribe (2003), we find that standard models do not capture these important relative price and quantity dynamics at the business cycle frequency. We explore the extent to which three extensions to the existing literature further our understanding: (i) overlapping generations, (ii) sunspots and (iii) financial frictions.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 333.
Date of creation: 11 Aug 2004
Date of revision:
new open economy macro; current account; real exchange rates;
Other versions of this item:
- Jagjit S. Chadha & Charles Nolan & Sun Qi & Christoph Thoenissen, 2004. "Can new open economy macroeconomic models explain business cycle facts?," Money Macro and Finance (MMF) Research Group Conference 2004 77, Money Macro and Finance Research Group.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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