Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210053 
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 04/2014
Publisher: 
Norges Bank, Oslo
Abstract: 
Existing DSGE models are not able to reproduce the observed influence of international business cycles on small open economies. We construct a two-sector New Keynesian model to address this puzzle. The set-up takes into account intermediate trade and producer heterogeneity, where goods and service industries differ in terms of i) price flexibility, ii) trade intensity, iii) technology, iv) I-O structure, and v) the volatility of productivity innovations. The combination of intermediate markets and heterogeneous producers makes international business cycles highly important for the small economy, even if it has a large service sector. Exploiting I-O matrices of Canadian and US industries, the model is able to reproduce the role of international disturbances typically found in empirical studies. Model simulations deliver cross-country correlations in macroeconomic variables of about 0:7, with half of the variation in domestic variables attributed to foreign shocks.
Subjects: 
small open economy
multi-sector
intermediate trade
international business cycles
JEL: 
E32
F41
F44
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-800-8
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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