Foreign shocks in an estimated multi-sector model

Drago Bergholt

No No 4/2014, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: How are macroeconomic fluctuations in open economies affected by interna- tional business cycles? To shed some light on this question, I develop and estimate a medium scale DSGE model for a small open economy. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroe- conomic regularities in the small open economy, all attributed to international dis- turbances. First, foreign shocks are crucial for domestic fluctuations at all forecast- ing horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these fea- tures have been accounted for in existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.

Keywords: DSGE; small open economy; international business cycles; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 F41 F44 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2014-04
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.bi.edu/globalassets/forskning/camp/wor ... king_camp_4-2014.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bny:wpaper:0022

Access Statistics for this paper

More papers in Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School Contact information at EDIRC.
Bibliographic data for series maintained by Helene Olsen ().