Investment and Trade Patterns in a Sticky-Price, Open-Economy Model

42 Pages Posted: 4 May 2009

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Jens Sondergaard

Bank of England - Monetary Analysis

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2009

Abstract

This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either.

Keywords: Trade Anomalies, Sticky Prices, Local-Currency Pricing

JEL Classification: F31, F37, F41

Suggested Citation

Martinez-Garcia, Enrique and Sondergaard, Jens, Investment and Trade Patterns in a Sticky-Price, Open-Economy Model (January 1, 2009). Available at SSRN: https://ssrn.com/abstract=1396303 or http://dx.doi.org/10.2139/ssrn.1396303

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Jens Sondergaard

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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