The Transmission of Domestic Shocks in Open Economies

Christopher John Erceg, Christopher Gust and López-Salido, J David

No 6574, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.

Keywords: imported intermediate inputs; open economy Phillips Curve; variable markups (search for similar items in EconPapers)
JEL-codes: E52 F41 F47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int and nep-mac
Date: 2007-11
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Chapter: The Transmission of Domestic Shocks in Open Economies (2007)
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