Building a new framework for analyzing effects of Japanese shocks on Asia

This paper is a first step toward building a new macroeconomic model that is usable for analyzing the effects of shocks that originate in Japan on Asian economies. The new framework borrows its central ingredients from the literature of the “new open economy macroeconomics†, that is characterized by explicit dynamic optimization, short-run nominal rigidity, and imperfect substitution between products. The last feature of this approach enables us to analyze how the trade structure between countries influences international transmission of shocks. This paper builds a three-country model, where the three countries are Asia, Japan, and US, which reflects trade and production patterns between them. Thus, the model is expected to yield more realistic predictions about how policy and productivity shocks in Japan affect Asian economies, both in the short and the long runs