The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence

Abstract:     
This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model can reproduce the observed fluctuations qualitatively. The answer is positive: both in the model and in the data the standard deviations of tradeable inflation, output and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. A key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks.

Keywords: New Open Economy Macroeconomics, Tradeable and Nontradeable Sectors, Business Cycles

JEL Classification: F41, E32

working papers series