Investment and trade patterns in a sticky-price, open-economy model

Enrique Martínez García () and Jens Sondergaard

No 28, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper develops a tractable two-country DSGE model with sticky prices la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. 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, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) 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.

JEL-codes: F31 F37 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
Note: Published as: Martinez-Garcia, Enrique and Jens Søndergaard (2009), "Investment and Trade Patterns in a Sticky-Price, Open-Economy Model," in The Economics of Imperfect Markets, ed. Giorgio Calcagnini and Enrico Saltari (Berlin: Springer), 183-212.
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Citations: View citations in EconPapers (1)

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Chapter: Investment and Trade Patterns in a Sticky-Price, Open-Economy Model (2010)
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