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A Two-Sector Small Open Economy Model with Monopolistically Competitive Non Traded Markets


  • Romain Restout


This paper explores the consequences of introducing a monopolistic competition in a two-sector open economy model. The effects of fiscal and technological shocks are simulated. First, unlike the perfectly competitive framework, the present model is consistent with the saving-investment correlations found in the data. Second, the degree of competition observed in non traded markets matters in determining the current account and investment responses to fiscal and technological shocks. Third, simulations show that the perfectly competitive two-sector model is too restrictive when investigating the relationship between the relative price of non traded goods and real factors like fi scal policies and productivity disturbances.

Suggested Citation

  • Romain Restout, 2008. "A Two-Sector Small Open Economy Model with Monopolistically Competitive Non Traded Markets," Economie Internationale, CEPII research center, issue 115, pages 165-192.
  • Handle: RePEc:cii:cepiei:2008-3tf

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    Monopolistic competition; inflation; fiscal policy; productivity;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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