The Transmission of Domestic Shocks in the Open Economy

Download or read book The Transmission of Domestic Shocks in the Open Economy written by Christopher J. Erceg and published by . This book was released on 2007 with total page 86 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labor supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.