The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Transmission of Domestic Shocks in the Open Economy
Christopher J. Erceg, Christopher Gust, and David Lopez-Salido
2007-906  (November 2007)

Abstract:  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.

Full paper(404 KB PDF) | Full paper (screen reader version)

Open economy Phillips Curve, Variable markups, Imported intermediate inputs

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2007 IFDPs
Accessibility | Contact Us
Last update: November 16, 2007