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

Posted: 14 Jul 2021

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Jens Sondergaard

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

This paper develops a tractable two-country DSGE model with sticky prices 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.

JEL Classification: F31, F37, F41

Suggested Citation

Martinez-Garcia, Enrique and Sondergaard, Jens, Investment and Trade Patterns in a Sticky-Price, Open-Economy Model (2009). Available at SSRN: https://ssrn.com/abstract=3885386

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

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

Jens Sondergaard

affiliation not provided to SSRN

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