Internationalised Production in a Small Open Economy

Aurelien Eyquen and Gunes Kamber

No DP2010/03, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: We show that internationalised production, modelled as trade in intermediate goods, brings the dynamics of a small open economy closer to that observed in the data. We build a stylized new-Keynesian small open economy model and we show that when production is internationalised, movements of international relative prices affect the economy through an additional channel, denoted as the “cost channel”. Both qualitatively and quantitatively, this channel (i) increases the share of output variance explained by foreign shocks, consistent with empirical evidence, (ii) implies that the exchange rate pass-through is closer to estimated values, and (iii) increases the international correlation of output relative to that of consumption.

JEL-codes: E30 F41 (search for similar items in EconPapers)
Pages: 30 p
Date: 2010-04
New Economics Papers: this item is included in nep-cba, nep-int, nep-mac and nep-opm
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2010/04

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