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Foreign shocks

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  • Drago Bergholt

    (Norges Bank)

Abstract

How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.

Suggested Citation

  • Drago Bergholt, 2015. "Foreign shocks," Working Paper 2015/15, Norges Bank.
  • Handle: RePEc:bno:worpap:2015_15
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2015/152015/
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    Other versions of this item:

    • Drago Bergholt, 2015. "Foreign Shocks," Working Papers No 11/2015, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.

    References listed on IDEAS

    as
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    Cited by:

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    2. William D. Craighead, 2020. "Intermediate Goods and Exchange Rate Disconnect," Open Economies Review, Springer, vol. 31(1), pages 113-129, February.
    3. José Mauricio Gil-León & Andrés Felipe Suárez-Cant, 2020. "Implications of risk premium shocks in a small and open economy," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 92, pages 133-172, Enero-Jun.
    4. Bergholt, Drago & Larsen, Vegard H. & Seneca, Martin, 2019. "Business cycles in an oil economy," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 283-303.
    5. Georgiadis, Georgios & Gräb, Johannes & Khalil, Makram, 2019. "Global value chain participation and exchange rate pass-through," Working Paper Series 2327, European Central Bank.
    6. Corbo, Vesna & Strid, Ingvar, 2020. "MAJA: A two-region DSGE model for Sweden and its main trading partners," Working Paper Series 391, Sveriges Riksbank (Central Bank of Sweden).

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    More about this item

    Keywords

    DSGE; small open economy; international business cycles; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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