Toward a new paradigm in open economy modeling: where do we stand?

This paper provides a selective, up-to-date survey of the recent, fast-growing literature on new open economy macroeconomics. Lucio Sarno begins with a review of the seminal paper in this literature, describing the baseline model proposed therein. He then covers a number of variants and generalizations of the baseline model involving the allowance for nominal rigidities, pricing to market, alternative preference specifications, and alternative financial markets structures. The author also discusses the recent stochastic extensions of these models, especially focusing on their implications for the link between risk and exchange rates and on new directions for the relevant literature.