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

Ashima Goyal and Abhishek Kumar ()
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Abhishek Kumar: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We find a basic new Keynesian monetary policy DSGE model estimated for differing countries (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 different 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. It follows emerging market central banks need policy tools in addition to interest rates to affect volatility creating variables like 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)
Pages: 41 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Asymmetry, terms of trade and the aggregate supply curve in an open economy model (2021)
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