Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/220253 
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper No. 164
Publisher: 
Institute for Applied Economic Research (ipea), Brasília
Abstract: 
We build a two-country version of the model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain DSGE model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation. Furthermore, home bias in households' preferences allows for real exchange rate fluctuation, giving rise to alternative channels of monetary transmission. Unlike most part of the literature, the small domestic open economy is derived as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy.
Subjects: 
new Keynesian Phillips curve
sticky prices
home bias
open economy
JEL: 
E32
E52
F41
Document Type: 
Working Paper

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