NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Transmission of Domestic Shocks in the Open Economy

Christopher J. Erceg, Christopher Gust, David López-Salido

NBER Working Paper No. 13613
Issued in November 2007
NBER Program(s):   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w13613

Published: Christopher Erceg & Christopher Gust & David López-Salido, 2007. "The Transmission of Domestic Shocks in Open Economies," NBER Chapters, in: International Dimensions of Monetary Policy, pages 89-148 National Bureau of Economic Research, Inc.

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