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New Directions for Stochastic Open Economy Models

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  • Maurice Obstfeld

    (University of California at Berkeley)

  • Kenneth Rogoff

    (Harvard)

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 EconWPA in its series International Finance with number 0004002.

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Length: 47 pages
Date of creation: 04 Apr 2000
Date of revision:
Handle: RePEc:wpa:wuwpif:0004002

Note: 47 pages Adobe.pdf
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