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How Resilient Is the U.S. Economy to Foreign Disturbances?

Olayinka Oyekola

Mathematics, 2022, vol. 10, issue 9, 1-33

Abstract: We assess the relative importance of domestic and foreign disturbances in explaining fluctuations in key macroeconomic variables and find that both types of shocks are equally important. We reach this conclusion within a constructed two-sector open economy DSGE model context, where we isolate the relative contributions of each group of disturbances to post-WWII U.S. business cycles. Our approach is to apply the indirect inference method to test the model’s fit against a four-equation VAR(1) of output, real exchange rate, energy use, and consumption. Our main result is that foreign disturbances are pivotal to driving movements in these home variables; accounting for 38% of the variability in aggregate output, 73% of the variation in the real exchange rate, 45% of the variance of energy use, and 84% of the volatility of consumption. Further, foreign disturbances are also identified to be crucial for some other home macroeconomic variables, explaining larger fractions in changes to investment, labour hours, and real interest rate. However, the U.S. economy appears to be resilient to foreign disturbances with respect to certain macroeconomic variables; in particular, exports, imports, real wages, and domestic absorption.

Keywords: foreign disturbances; DSGE model; open economy macroeconomics; indirect inference; U.S. economy (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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