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FraNK: fragmentation in the NK model

Author

Listed:
  • Alessandro Moro

    (Bank of Italy)

  • Valerio Nispi Landi

    (Bank of Italy)

Abstract

We set up a multi-country New Keynesian model to study the effects of a geoeconomic fragmentation shock, modelled as an increase in the tax rates on goods, commodities, and bonds purchased from rival countries. First, we derive a closed-form solution of the model by using a symmetric calibration on two blocks of countries and we show analytically that geoeconomic fragmentation reduces output. The effect on PPI inflation is ambiguous, depending positively on the importance of commodities in the production function. Then, we calibrate the model for four regions (the United States, their allies, a China-led block, and the neutral rest of the world) and find that fragmentation predominantly affects the China-aligned bloc and the US allies, with these countries experiencing larger declines in production and consumption. In contrast, the US are relatively shielded from the shock because of their limited exposure to the rival bloc. The spillovers to neutral countries are negligible.

Suggested Citation

  • Alessandro Moro & Valerio Nispi Landi, 2024. "FraNK: fragmentation in the NK model," Temi di discussione (Economic working papers) 1475, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1475_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1475/en_tema_1475.pdf
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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