DP6574 The Transmission of Domestic Shocks in Open Economies
|Author(s):||Christopher Erceg, Christopher Gust, J David López-Salido|
|Publication Date:||November 2007|
|Keyword(s):||imported intermediate inputs, open economy Phillips Curve, variable markups|
|JEL(s):||E52, F41, F47|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6574|
This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.