The Transmission of Domestic Shocks in the Open Economy

76 Pages Posted: 9 Dec 2007

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

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.

Keywords: Open economy Phillips Curve, Variable markups, Imported intermediate inputs

JEL Classification: F41, F47, E52

Suggested Citation

Erceg, Christopher J. and Gust, Christopher J. and Lopez-Salido, David, The Transmission of Domestic Shocks in the Open Economy (November 2007). FRB International Finance Discussion Paper No. 906. Available at SSRN: https://ssrn.com/abstract=1066743 or http://dx.doi.org/10.2139/ssrn.1066743

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
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202-452-2575 (Phone)
202-736-5638 (Fax)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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