NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

New Directions for Stochastic Open Economy Models

Maurice Obstfeld, Kenneth Rogoff

NBER Working Paper No. 7313
Issued in August 1999
NBER Program(s):   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w7313

Published: Journal of International Economics, Vol. 50, no. 1 (February 2000): 117-153

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