Asymmetry, terms of trade and the aggregate supply curve in an open economy model

Ashima Goyal and Abhishek Kumar

The Journal of Economic Asymmetries, 2021, vol. 24, issue C

Abstract: A new Keynesian monetary policy DSGE model estimated for an emerging and an advanced economy (India and the US) gives deep parameter estimates, impulse responses and forecast error variance decompositions for each in line with theory and country structure, implying similar functional forms can be estimated for differing countries with estimated coefficients capturing differences in structure. Features that create excess volatility, especially in emerging markets, explain differences in policy shocks. The feature explored in this paper is external terms of trade. When this is dampened in the emerging market, using policy tools other than the policy rate, the aggregate supply curve, which was relatively steeper, becomes flatter. As a result volatility of interest rates and their impact on output and inflation, which was relatively higher in India, becomes lower than in the US. Asymmetries between the countries are reversed. The estimated coefficient of the terms of trade is relatively higher in the US Taylor rule, while emerging market central banks find other policy tools more effective to manage external terms of trade.

Keywords: DSGE; India; US; Asymmetry; Open economy model; Terms of trade; Aggregate supply curve (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Asymmetry, terms of trade and the aggregate supply curve in an open economy model (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:24:y:2021:i:c:s1703494921000116

DOI: 10.1016/j.jeca.2021.e00206

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