Two-Country New Keynesian DSGE Model: A Small Open Economy as a Limit Case

Marcos Silveira

No 1157, Discussion Papers from Instituto de Pesquisa Econômica Aplicada - IPEA

Abstract: We build a two-country version of the model in Gali & Monacelli(2005), which extends for a small open economy the new KeynesainDSGE model used as tool for monetary policy analysis in closedeconomies. A distinctive feature of the model is that the terms oftrade enters directly into the new Keynesian Phillips curve as a newpushing-cost variable feeding the inflation. Furthermore, home bias inhouseholds? preferences allows for real exchange rate fluctuation, givingrise to alternative channels of monetary transmission. Unlike mostpart of the literature, the small domestic open economy is derived asa limit case of the two-coutry model, rather than assuming exogenousprocesses for the foreign variables. This procedure preserves the roleplayed by foreign nominal frictions in the way as international monetarypolicy shocks are conveyed into the small domestic economy.

Pages: 48 pages
Date: 2006-02
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:ipe:ipetds:1157

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