The Transmission of Domestic Shocks in the Open Economy

71 Pages Posted: 27 Nov 2007 Last revised: 14 Mar 2021

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Christopher Gust

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 2007

Abstract

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 labor 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.

Suggested Citation

Erceg, Christopher J. and Gust, Christopher and Lopez-Salido, David, The Transmission of Domestic Shocks in the Open Economy (November 2007). NBER Working Paper No. w13613, Available at SSRN: https://ssrn.com/abstract=1032866

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Christopher Gust

Board of Governors of the Federal Reserve System ( email )

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David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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