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Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects"

Author

Listed:
  • Ippei Fujiwara

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp))

  • Naohisa Hirakata

    (Financial Systems and Bank Examination Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

Abstract

In this paper, we first set up a model that incorporates firm dynamics into the Global Economy Model (henceforth, GEM) developed by the IMF Research Department. Then, we show how the economic variables respond to the shocks that shift the production frontier outwards, namely productivity gains in manufacturing, efficiency gains in creating new firms, and an increase in the labor force. Contrary to the model used in previous research on the same topic by Corsetti, Martin and Pesenti (2007, henceforth, CMP), our model contains rich and realistic dynamics embedded in the GEM such as a time-to-build constraint for firm dynamics, and nominal price and wage stickiness. We show that (1) the analytical results of CMP are dependent on the elasticity of substitution between domestic and foreign goods, (2) short-run responses could be different from those in CMP because of the existence of price and wage stickiness, and (3) persistence of shocks also alters the direction of responses via the wealth effect. These results suggest that it is of great importance for policy institutions to acknowledge the dynamic aspects of productivity spillovers by simulating a model with richer dynamics like the GEM.

Suggested Citation

  • Ippei Fujiwara & Naohisa Hirakata, 2007. "Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects"," IMES Discussion Paper Series 07-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:07-e-07
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    New Keynesian Model; Monetary Policy; Transparency; Productivity Growth; Learning;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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