Money and the Open Economy Business Cycle: A Flexible Price Model (original) (raw)

Optimal Price and Inventory Adjustment in an Open-Economy Model of the Business Cycle

The Quarterly Journal of Economics, 1985

This paper devf lops an open-economy macroeconomic model which can be used to interpret the observed fluctuations in output, inventories, prices, and exchange rates in the medium-sized economies of the world. The model is consistent with the major empirical regularities that have been discovered in studies of business cycles as closed-economy phenomena arid in empirical studies of prices and exchange rates. The empirical regularities are (i) changes in the nominal money supply cause real output fluctuations, (ii) deviations of output from a "natural rate" show persistence, (iii) exchange rates are more volatile than nominal prices of goods, and (iv) depreciations of the currency coincide with deteriorations of the terms of trade. A controversial aspect of the model is that only unperceived money has real effects. The channel through which these effects arise involves a misperception by rational maximizing firms of the true demand that they will face after having set prices. The firms learn about their environment from equilibrium asset prices, and the dynamics of the model reflect the optimal response of inventory-holding firms rather than ad hoc price dynamics.

Monetary Aspects of Business Cycles in an Open Developing Economy

This paper investigated the influence of selected monetary actions on the real economy of Nigeria. A Monetarist framework and a causality approach were employed in the analysis. The analysis covered nominal and real specifications and, level and order of integration. Whereas, the outcome of the experiments involving nominal specifications was mixed, real expressions firmly upheld monetary actions as the key driver of economic activities. The influences of both the price level and exogenous variables were palpable.

Money and Business Cycle in a Small Open Economy

2000

This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.

The Simple Post Keynesian Monetary Policy Model: An Open Economy Approach

Review of Political Economy, Vol. 26, Issue 4, 2014

Monetary policy with an inflation targeting rule is analyzed through a simple small-scale Post-Keynesian model that incorporates open economy issues. In contrast with previous Post-Keynesian attempts, the model embodies policy authorities that are committed not only to hitting inflation and/or output targets, but also to the achievement of the external balance. To take account of the external balance objective, we model the real exchange rate as an endogenous and moving target, with the nominal exchange rate being the instrument of that target. The model shows that in response to an adverse external shock the central bank has to consider first the required real exchange rate adjustment that will preserve the external balance, and secondly the level at which the interest rate must be set in order to maintain inflation stabilization. Keeping inflation to target requires higher interest rates and strong reliance on the unemployment channel which, under certain circumstances, also has adverse side effects on income distribution. We show that to deal with an exogenous external shock a policy mix of real exchange rate targeting and income distribution targeting outperforms inflation targeting.

Monetary Cycles

2004

The sources of economic fluctuations discussed in the existing literature are information asymmetry, incomplete contracts, and serially correlated exogenous shocks. We show that an economy may fluctuate cyclically without these assumptions if production of payment services (deposit money) necessitates physical capital.

Sticky Prices, Money, and Business Fluctuations

Journal of Money, Credit and Banking, 1991

Can nominal contracts make a difference for the neutrality of money if these arise endogenously in general equilibrium? This paper utilizes a version of Lucas's seminal equilibrium business cycle theory to address this question. However, we depart from Lucas in assuming that (1) agents have complete information about the money stock; (ii) fundamental shocks to the system are purely redistributive and private information; and (iii) moral hazard precludes conventional insurance markets. With an exogenous restriction on contracts, money is fully neutral. But, when this restriction is lifted, efficient risk-sharing between suppliers and demanders leads to a potential nonneutralitv of money. In particular, if an increase in the money growth rate signals a rise in the dispersion of shocks to demanders' wealth, then prices adjust only partially to monetary shocks and there is a positive association between money and output.

2007), ”A Monetary Business Cycle Model with Unemployment,” forthcoming

2015

To reproduce key features of the post-war U.S. data, most monetary business cycle models must assume there are high price markups and that agents have high labour supply elasticities. Unfortu-nately, microeconomic evidence indicates that markups and labour supply elasticities are generally low. This paper eliminates the need for these assumptions by introducing imperfectly observed effort into a limited participation model. In the model, detected shirkers forgo a bonus and house-holds make their decisions about their level of monetary deposits for the period in advance of seeing the shocks to the economy. The estimated model is better able to capture the sluggish response of prices to a monetary policy shock than the standard model, and is consistent with recent evidence regarding the qualitative responses of the U.S. economy to technology shocks, fiscal policy shocks and monetary policy shocks. (JEL E32, E4)