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Investment and Trade Patterns in a Sticky-Price, Open-Economy Model

Enrique Martínez-García () and Jens Søndergaard ()
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Enrique Martínez-García: Federal Reserve Bank of Dallas
Jens Søndergaard: Monetary Analysis, Bank of England

Authors registered in the RePEc Author Service: Enrique Martínez García ()

Chapter Chapter 10 in The Economics of Imperfect Markets, 2010, pp 183-212 from Springer

Abstract: Abstract This paper explores a two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the investment decision in the presence of adjustment costs of two types, i.e., capital adjustment costs (CAC) and investment adjustment costs (IAC). We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports series, and less volatile investment. We document three important facts on US trade dynamics: (1) the S-shaped cross-correlation between real GDP and the real net exports share, (2) the J-curve between terms of trade and net exports, and (3) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model’s ability to match these stylized facts. Nominal rigidities cannot account for these features either.

Keywords: Real Exchange Rate; Adjustment Cost; Contemporaneous Correlation; Nominal Rigidity; Sticky Prex (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/978-3-7908-2131-4_10

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