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The Transmission of Domestic Shocks in Open Economies

In: International Dimensions of Monetary Policy

  • Christopher Erceg
  • Christopher Gust
  • David López-Salido

This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.

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This chapter was published in:
  • Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0511.
    Handle: RePEc:nbr:nberch:0511
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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