New Directions for Stochastic Open Economy Models

Maurice Obstfeld and Kenneth S Rogoff

International Finance from EconWPA

Abstract: The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Despite the potential interplay between imperfections due to sticky wages and monopoly, the optimal monetary policy rule has a closed-form solution. To motivate our model, we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local-currency pricing.

JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2000-04-04
Note: 47 pages Adobe.pdf
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Related works:
Working Paper: New Directions for Stochastic Open Economy Models (1999)
Working Paper: New Directions for Stochastic Open Economy Models (1999)
Working Paper: New Directions for Stochastic Open Economy Models (1999)
Journal Article: New directions for stochastic open economy models (2000)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0004002

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