The Transmission of Domestic Shocks in Open Economies

73 Pages Posted: 6 Jun 2008

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

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 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.

Keywords: imported intermediate inputs, open economy Phillips Curve, variable markups

JEL Classification: E52, F41, F47

Suggested Citation

Erceg, Christopher J. and Gust, Christopher and Lopez-Salido, David, The Transmission of Domestic Shocks in Open Economies. CEPR Discussion Paper No. DP6574, Available at SSRN: https://ssrn.com/abstract=1140101

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Christopher Gust

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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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