The Mundell-Fleming-Dornbusch Model in a New Bottle

No 455, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We introduce elements of state-dependent pricing and strategic complementarity within an otherwise standard "New Open Economy Macroeconomics" model, and develop its implications for the dynamics of real and nominal economic activity. Under a traditional Producer-Currency-Pricing environment, our framework replicates key international features following a domestic monetary shock. In contrast with its time-dependent counterpart, our approach delivers (i) a high international output correlation relative to consumption correlation, (ii) a delayed surge in inflation across countries, (iii) a delayed overshooting of exchange rates, and (iv) a J-curve dynamic in the domestic trade balance. Moreover, our model emphasizes the expenditure-switching effect as an important channel of monetary policy transmission, and consequently keeps the spirit of the Mundell-Fleming-Dornbusch model within the confines of the microfounded dynamic general equilibrium approach

Keywords: international monetary policy transmission; international comovements; state-dependent pricing; strategic complementarity. (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-mac
Date: 2005-11-11
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Downloads: (external link)
http://people.bu.edu/landry/MFDnewbottle.pdf main text (application/pdf)
http://repec.org/sce2005/up.20815.1107796599.pdf (application/pdf)

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