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The New Open Economy Macroeconomics: A Critical Appraisal

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  • David D. VanHoose

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Abstract

Within only a few years, the new open economy macroeconomics (NOEM) has emerged as a potential rival to the Mundell-Fleming framework, as modified by Dornbusch and others in the 1980s and 1990s using linear-quadratic models, as the dominant analytical framework in the study of open economies. This paper reviews some of the main developments in this literature. It offers a critical appraisal of its contributions to date and discusses potential pitfalls of taking a pure NOEM approach by dismissing work not based in explicit utility maximization as "ad hoc." The paper proposes broadening the NOEM literature to include consideration of heterogeneities within and across open economies. In light of the complexities involved in modeling heterogeneous agents or structures, the field of open economy macroeconomics may stand to gain from the pursuit of an impure NOEM. Work along these lines would de-emphasize dynamics, general equilibrium, and explicit optimization in favor of a focus on the true innovation of the NOEM literature, which has been highlighting the crucial importance of accounting for imperfect competition and price and wage rigidities in macroeconomic theories of open economies.

Suggested Citation

  • David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, April.
  • Handle: RePEc:kap:openec:v:15:y:2004:i:2:p:193-215
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    Cited by:

    1. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1336-1347, December.
    2. Carl R. Gwin & David D. Van Hoose, 2008. "Disaggregate Evidence On Price Stickiness And Implications For Macro Models," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 561-575, October.
    3. Yiannis Stournaras, 2005. "Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination," Working Papers 26, Bank of Greece.
    4. 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.
    5. Siklos, Pierre L., 2006. "Managed floating as a strategy to achieve selected monetary policy objectives," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 447-464.
    6. Tervala, Juha, 2012. "International welfare effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 356-376.
    7. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester.
    8. repec:eee:joecas:v:6:y:2009:i:1:p:15-28 is not listed on IDEAS
    9. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.

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