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Endogenously persistent output dynamics: A puzzle for the sticky-price model?

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  • Fabio Ghironi

    () (Boston College)

Abstract

I show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once openness of the economy is taken into account. I make this point using a two-country, monetary model of macroeconomic interdependence under internationally incomplete asset markets with stationary net foreign asset dynamics. If asset markets are incomplete, price stickiness generates endogenous persistence in the cross-country GDP differential by introducing persistence in the dynamics of the relative price differential between the two economies. This results in the dependence of the current real GDP differential on its past value, as well as on the stock of net foreign assets accumulated in the previous period. The elasticity of the current GDP differential to its past value is sizable for standard parameter values, implying a quantitatively significant persistence effect through this channel. Endogenous persistence yields hump-shaped responses of GDP to productivity and monetary policy shocks.

Suggested Citation

  • Fabio Ghironi, 2002. "Endogenously persistent output dynamics: A puzzle for the sticky-price model?," Boston College Working Papers in Economics 527, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:527
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    References listed on IDEAS

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    Cited by:

    1. Michael Gail, 2001. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices," Volkswirtschaftliche Diskussionsbeiträge 96-01, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 14 Feb 2003.
    2. Karen Dury & Özlem Oomen, 2007. "The real exchange rate and quality improvements," Bank of England working papers 320, Bank of England.

    More about this item

    Keywords

    dynamics; incomplete markets; persistence; open economy; sticky prices;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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