IDEAS home Printed from https://ideas.repec.org/p/tcd/tcduee/200212.html
   My bibliography  Save this paper

Dynamic General Equilibrium Analysis: The Open Economy Dimension

Author

Listed:
  • Philip R. Lane
  • Giovanni Ganelli

Abstract

This paper discusses some key issues in the application of dynamic general equilibrium analysis to open economy modelling. In the context of the new open economy macroeconomics paradigm, we focus on: (i) the currency denomination of sticky prices; (ii) the role of the current account and net foreign assets; and (iii) the impact of fiscal policy.

Suggested Citation

  • Philip R. Lane & Giovanni Ganelli, 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," Trinity Economics Papers 200212, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:200212
    as

    Download full text from publisher

    File URL: http://www.tcd.ie/Economics/TEP/2002_papers/tepno12PL22.PDF
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul R. Bergin, 2002. "Is there a role for international policy coordination?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb8.
    2. Devereux, Michael B. & Lane, Philip R., 2003. "Understanding bilateral exchange rate volatility," Journal of International Economics, Elsevier, vol. 60(1), pages 109-132, May.
    3. Sutherland, Alan, 2002. "A Simple Second-Order Solution Method For Dynamic General Equilibrium Models," CEPR Discussion Papers 3554, C.E.P.R. Discussion Papers.
    4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    5. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
    6. Svensson, Lars E O & van Wijnbergen, Sweder, 1989. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," Economic Journal, Royal Economic Society, vol. 99(397), pages 785-805, September.
    7. Maurice Obstfeld, 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," NBER Working Papers 8369, National Bureau of Economic Research, Inc.
    8. Michael B. Devereux & Charles Engel & CÈdric Tille, 2003. "Exchange Rate Pass-Through and the Welfare Effects of the Euro," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 223-242, February.
    9. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, vol. 46(6), pages 1049-1071, June.
    10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    11. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, April.
    12. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    13. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
    14. Giovanni Lombardo, "undated". "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York.
    15. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
    16. Maurice Obstfeld & Kenneth S. Rogoff, 2000. "Perspectives on OECD economic integration : implications for U.S. current account adjustment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 169-208.
    17. Ganelli, Giovanni, 2005. "The new open economy macroeconomics of government debt," Journal of International Economics, Elsevier, vol. 65(1), pages 167-184, January.
    18. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, vol. 63(1), pages 73-96, June.
    19. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    20. Cavallo, Michele & Ghironi, Fabio, 2002. "Net foreign assets and the exchange rate: Redux revived," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1057-1097, July.
    21. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February.
    22. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
    23. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
    24. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 765-783.
    25. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
    26. Lane, Philip R. & Perotti, Roberto, 2003. "The importance of composition of fiscal policy: evidence from different exchange rate regimes," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2253-2279, September.
    27. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    28. Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136, National Bureau of Economic Research, Inc.
    29. Caselli, Paola, 2001. "Fiscal consolidation under fixed exchange rates," European Economic Review, Elsevier, vol. 45(3), pages 425-450, March.
    30. Dixon, Huw David & Rankin, Neil, 1994. "Imperfect Competition and Macroeconomics: A Survey," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 171-199, April.
    31. Senay, Ozge, 1998. "The Effects of Goods and Financial Market Integration on Macroeconomic Volatility," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(0), pages 39-61, Supplemen.
    32. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 521-539, December.
    33. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 503-535.
    34. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
    35. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates: A Synthesis Of Some New Open Economy Macro Models," Manchester School, University of Manchester, vol. 70(S1), pages 1-15.
    36. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    37. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    38. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc.
    39. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 295-330, March.
    40. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    41. Mr. Hamid Faruqee & Mr. Douglas Laxton, 2000. "Life-Cycles, Dynasties, Savings: Implications for Closed and Small, Open Economies," IMF Working Papers 2000/126, International Monetary Fund.
    42. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July.
    43. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
    44. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
    45. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    46. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December.
    47. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    48. Fabio Ghironi, 2000. "Towards New Open Economy Macroeconometrics," Boston College Working Papers in Economics 469, Boston College Department of Economics.
    49. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    50. 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.
    51. Paul R. Bergin, 2017. "Putting the “New Open Economy Macroeconomics” to a Test," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 4, pages 79-115, World Scientific Publishing Co. Pte. Ltd..
    52. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
    53. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    54. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    55. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-657, August.
    56. Evans, Paul, 1991. "Is Ricardian Equivalence a Good Approximation?," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 626-644, October.
    57. Kollmann, Robert, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," Journal of International Economics, Elsevier, vol. 55(2), pages 243-262, December.
    58. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    59. Cédric Tille, 2000. "Is the integration of world asset markets necessarily beneficial in the presence of monetary shocks?," Staff Reports 114, Federal Reserve Bank of New York.
    60. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    61. Carlo A. Favero, "undated". "How do European monetary and fiscal authorities behave?," Working Papers 214, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    62. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    63. Cédric Tille, 1999. "The role of consumption substitutability in the international transmission of shocks," Staff Reports 67, Federal Reserve Bank of New York.
    64. Philippe Bacchetta & Eric van Wincoop, 2000. "Trade Flows, Prices, and The Exchange Rate Regime," Working Papers 00.11, Swiss National Bank, Study Center Gerzensee.
    65. Ravn, Morten, 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers 2940, C.E.P.R. Discussion Papers.
    66. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
    67. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    68. Jaume Ventura, 2001. "A Portfolio View of the U.S. Current Account Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 241-258.
    69. Lane, Philip R., 2002. "Comment on: Net foreign assets and the exchange rate: Redux revived," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1099-1102, July.
    70. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, vol. 65(2), pages 375-399, March.
    71. Mr. Kenneth Rogoff, 2002. "Dornbusch’s Overshooting Model After Twenty-Five Years," IMF Working Papers 2002/039, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    2. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    3. Hamza Ali Malik, 2006. "Monetary-Exchange Rate Policy and Current Account Dynamics," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 23-57.
    4. David Bowman & Brian M. Doyle, 2003. "New Keynesian, open-economy models and their implications for monetary policy," International Finance Discussion Papers 762, Board of Governors of the Federal Reserve System (U.S.).
    5. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    6. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 65-116, National Bureau of Economic Research, Inc.
    7. Cavallo, Michele & Ghironi, Fabio, 2002. "Net foreign assets and the exchange rate: Redux revived," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1057-1097, July.
    8. Corsetti, Giancarlo, 2007. "New Open Economy Macroeconomics," CEPR Discussion Papers 6578, C.E.P.R. Discussion Papers.
    9. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    10. Ganelli, Giovanni & Tervala, Juha, 2010. "Public infrastructures, public consumption, and welfare in a new-open-economy-macro model," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 827-837, September.
    11. repec:zbw:bofrdp:2009_008 is not listed on IDEAS
    12. Ganelli, Giovanni & Tervala, Juha, 2010. "Public infrastructures, public consumption, and welfare in a new-open-economy-macro model," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 827-837, September.
    13. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, April.
    14. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
    15. Ganelli, Giovanni & Tervala, Juha, 2009. "Public infrastructures, public consumption and welfare in a new open economy macro model," Bank of Finland Research Discussion Papers 8/2009, Bank of Finland.
    16. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    17. Alpaslan AKÇORAOĞLU, 2012. "Yeni Açık Ekonomi Makroiktisat Teorisi ve Para Politikasının Uluslararası Boyutları," Ekonomik Yaklasim, Ekonomik Yaklasim Association, vol. 23(85), pages 57-82.
    18. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    19. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, vol. 65(2), pages 375-399, March.
    20. Ganelli, Giovanni, 2005. "The new open economy macroeconomics of government debt," Journal of International Economics, Elsevier, vol. 65(1), pages 167-184, January.
    21. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tcd:tcduee:200212. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Colette Angelov (email available below). General contact details of provider: https://edirc.repec.org/data/detcdie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.