Determinacy in Multi-Country DSGE Models: The Role of Pricing Paradigms and Economic Openness

Stefan Girstmair ()
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Stefan Girstmair: Bank of Lithuania

No 137, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper studies determinacy in a three-country New Keynesian DSGE model. Extending Gopinath et al. (2020), I examine how invoicing currencies and openness shape monetary policy effectiveness. Three results emerge. First, there is a robust trade-off such that stronger output gap targeting allows weaker inflation responses without loss of determinacy. Second, pricing paradigms matter. Producer currency pricing (PCP) yields the broadest determinacy regions, local currency pricing (LCP) lies in between, and dominant currency pricing (DCP) is most restrictive for non-issuers of the dominant currency. Third, openness narrows determinacy sets as it amplifies interactions among central banks’ policies, complicating the attainment of determinacy. An application with Bayesian estimates for the U.S. and the euro area confirms these patterns. The results highlight that determinacy depends not only on domestic rules but also on global invoicing structures and trade integration.

Keywords: Determinacy; Taylor rule; Three-country new Keynesian model; Pricing paradigms; Opennessy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F33 F4 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2025-12-08
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