Money and the Open Economy Business Cycle: a Flexible Price Model

49 Pages Posted: 19 Jun 2004

See all articles by Robert P. Flood

Robert P. Flood

International Monetary Fund (IMF) - Research Department; CENTRUM Business School; National Bureau of Economic Research (NBER)

Robert J. Hodrick

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: June 1986

Abstract

This paper develops an open-economy model of the business cycle. Thenominal prices in the model are flexible and monetary nonneutrality isdeveloped using information confusion about the sources of disturbances todemand coupled with differential persistence of demand shocks. Firms useinventories to smooth their production, and consumers follow a stochasticpermanent income expenditure function. The major implication of the modelis that unperceived monetary disturbances improve the terms of trade andincrease real output in contrast to sticky price models in which the termsof trade deteriorates. This implication of the model is examinedempirically.

Suggested Citation

Flood, Robert P. and Hodrick, Robert J., Money and the Open Economy Business Cycle: a Flexible Price Model (June 1986). NBER Working Paper No. w1967. Available at SSRN: https://ssrn.com/abstract=344781

Robert P. Flood (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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202-623-7667 (Phone)
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CENTRUM Business School

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Los Alamos de Monterrico
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Peru

National Bureau of Economic Research (NBER)

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Robert J. Hodrick

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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New York, NY 10016-4309
United States

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