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Countercyclical Trade Balance and Persistent Real Exchange Rates in a Neomonetarist Model

  • Oleg Zamulin

    ()

    (New Economic School and CEFIR)

A sticky price dynamic general equilibrium business cycle model of a small open economy achieves several powerful results. Presence of physical investment and incomplete markets helps generate initial current account de cits after money shocks. The trade balance is hence countercyclical in a simulated economy, in which the business cycle is driven by monetary or persistent technological shocks. A high degree of real price rigidity for nontradable goods produces persistent deviations from purchasing power parity. Likewise, the presence of the nontradable sector can generate overshooting of the exchange rate, which depends on non-separability of labor and consumption, as opposed to the more traditional liquidity e ect based overshooting. However, the volatility of nominal and real exchange rates observed in the data can only be reproduced after the introduction of local currency pricing assumption. Lastly, the proposed model is analytically tractable, which helps obtain rm intuition before using numerical solutions.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0016.

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Length: 43 pages
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:cfr:cefirw:w0016
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  1. Paul R. Bergin & Robert C. Feenstra, . "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Department of Economics 99-01, California Davis - Department of Economics.
  2. Robert Miguel W. K. Kollman, 1997. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities; A Quantitative Investigation," IMF Working Papers 97/7, International Monetary Fund.
  3. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
  4. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
  5. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers 96-28, C.V. Starr Center for Applied Economics, New York University.
  6. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  7. Jon Faust & John H. Rogers, 1999. "Monetary policy's role in exchange rate behavior," International Finance Discussion Papers 652, Board of Governors of the Federal Reserve System (U.S.).
  8. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  10. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  11. Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
  12. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  13. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
  14. John B. Taylor, 1998. "Staggered Price and Wage Setting in Macroeconomics," NBER Working Papers 6754, National Bureau of Economic Research, Inc.
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  16. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," NBER Working Papers 4493, National Bureau of Economic Research, Inc.
  17. repec:dgr:kubcen:199597 is not listed on IDEAS
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