New Directions for Stochastic Open Economy Models

By M. Obstfeld, Kenneth S. Rogoff. 2000

942 citations recorded by the source corpus.

The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Despite the potential interplay between imperfections due to sticky wages and monopoly, the optimal monetary policy rule has a closed-form solution. To motivate our model, we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local-currency pricing.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8af120f97bd799d1699a60f32842d2c002c41dad

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In Economics and Econometrics

Citations in the corpus

Is Bad News About Inflation Good News for the Exchange Rate (2007, neutral): “contributions of Obstfeld and Rogoff (1996, 2000) and the many other papers”
Understanding bilateral exchange rate volatility (2003, background): “… = and (1 ) MM PC a C P ρ− = − , respectively, where a is the weight on non-traded goods in aggregate consumption, and ρ is the elasticity of substitution between import goods and 3 This is a very simple version of a new open macro model (see Obstfeld and Rogoff 1995, 2000, and Lane 2001).”
The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation (2001, positive): “See, for two - country models with multi-period price stickiness have recently been considered by Betts and Devereux (1998) and Chari et al. (1998).”
Price Stability with Imperfect Financial Integration (2001, positive): “As outlined in Obstfeld and Rogoff (2000) the intratemporal elasticity of substitution is a critical parameter in this class of open-macro models.”
Monetary and Fiscal Interactions in Open Economies (2004, background): “In the context of stochastic open economy models, contributions to the modern theory of optimal monetary policy can be found in Obstfeld and Rogoff (1995, 1998, 2000, 2002), Corsetti and Pesenti (2001a,b), Devereux and Engel (2000), Benigno and Benigno (2001), Clarida et al. (2001) and Sutherland…”
Openness, Imperfect Exchange Rate Pass-Through and Monetary Policy (2002, positive): “The domestic monopolistically competitive goods market is modelled as in the closed-economy models of Rotemberg and Woodford (1997) and Clarida, Gali and Gertler (1999).”
Ppp and the Balassa Samuelson Effect: The Role of the Distribution Sector (2001, positive): “Obstfeld and Rogoff (2000) briefly mention, but do not pursue, the role of the distribution sector as an alternative explanation for the relatively slow mean reversion in real exchange rates.”