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Determinacy in Multi-Country DSGE Models: The Role of Pricing Paradigms and Economic Openness

Author

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  • Stefan Girstmair

    (Bank of Lithuania)

Abstract

This paper studies determinacy in a three-country New Keynesian DSGE model. Extending Gopinath et al. (2020), I examine how invoicing currencies and openness shape monetary policy effectiveness. Three results emerge. First, there is a robust trade-off such that stronger output gap targeting allows weaker inflation responses without loss of determinacy. Second, pricing paradigms matter. Producer currency pricing (PCP) yields the broadest determinacy regions, local currency pricing (LCP) lies in between, and dominant currency pricing (DCP) is most restrictive for non-issuers of the dominant currency. Third, openness narrows determinacy sets as it amplifies interactions among central banks’ policies, complicating the attainment of determinacy. An application with Bayesian estimates for the U.S. and the euro area confirms these patterns. The results highlight that determinacy depends not only on domestic rules but also on global invoicing structures and trade integration.

Suggested Citation

  • Stefan Girstmair, 2025. "Determinacy in Multi-Country DSGE Models: The Role of Pricing Paradigms and Economic Openness," Bank of Lithuania Working Paper Series 137, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:137
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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