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Propagation of Nominal Shocks in Open Economies
Author(s) -
Andersen Torben M.,
Beier Niels C.
Publication year - 2003
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1046/j.1467-9957.2003.00367.x
Subject(s) - economics , wage , small open economy , open economy , econometrics , persistence (discontinuity) , macroeconomics , capital (architecture) , economy , monetary policy , exchange rate , labour economics , history , geotechnical engineering , archaeology , engineering
Empirical evidence documents substantial persistence in the adjustment process to nominal shocks. Existing open‐economy models either have failed to generate interesting dynamics or have found that the mechanisms are quantitatively weak. We consider the propagation of nominal shocks in a fully specified stochastic intertemporal open‐economy model with incomplete capital markets and staggered nominal wage contracts. It is shown that persistence depends on wage–price interdependences (spiral), which in turn in a general equilibrium setting depend on structural parameters characterizing both the demand and the supply side of markets. Parameter choices strengthening wage–price interdependences thus strengthen persistence as is demonstrated analytically and illustrated numerically. A further product of the paper is that it develops a method by which to solve explicitly for a stochastic intertemporal version of the ‘new open‐economy macroeconomics’ model in which the expenditure switching effect is effective.