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New directions for stochastic open economy models

  • Obstfeld, Maurice
  • Rogoff, Kenneth

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 50 (2000)
Issue (Month): 1 (February)
Pages: 117-153

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Handle: RePEc:eee:inecon:v:50:y:2000:i:1:p:117-153
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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