Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82368
Authors: 
Andersen, Torben M.
Beier, Niels C.
Year of Publication: 
2002
Series/Report no.: 
Danmarks Nationalbank Working Papers 5
Abstract: 
Empirical evidence documents substantial persistence in the adjustment process to nominal shocks. Existing open-economy models have failed either to generate interesting dynamics or found that the mechanisms are quantitatively weak. We consider the propagation of nominal shocks in a fully specified stochastic intertemporal open-economy model with incomplete capital markets and staggered nominal wage contracts. It is shown that persistence depends on wage-price interdependencies (spiral), which in turn in a general-equilibrium setting depends on structural parameters characterizing both the demand and the supply side of markets. Parameter choices strengthening wage-price interdependencies thus strengthen persistence as is demonstrated analytically and illustrated numerically. A further product of the paper is that it develops a method by which to solve explicitly for a stochastic intertemporal version of the New Open-Economy Macroeconomics model in which the expenditure switching effect is effective.
Subjects: 
current account
exchange rates
incomplete capital markets
nominal shocks
persistence
staggering
JEL: 
E32
F41
Document Type: 
Working Paper

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