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Investment and Trade Patterns in a Sticky-Price, Open-Economy Model

In: The Economics of Imperfect Markets

Author

Listed:
  • Enrique Martínez-García

    (Federal Reserve Bank of Dallas)

  • Jens Søndergaard

    (Monetary Analysis, Bank of England)

Abstract

This paper explores a two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the investment decision in the presence of adjustment costs of two types, i.e., capital adjustment costs (CAC) and investment adjustment costs (IAC). We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports series, and less volatile investment. We document three important facts on US trade dynamics: (1) the S-shaped cross-correlation between real GDP and the real net exports share, (2) the J-curve between terms of trade and net exports, and (3) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model’s ability to match these stylized facts. Nominal rigidities cannot account for these features either.

Suggested Citation

  • Enrique Martínez-García & Jens Søndergaard, 2010. "Investment and Trade Patterns in a Sticky-Price, Open-Economy Model," Contributions to Economics, in: Giorgio Calcagnini & Enrico Saltari (ed.), The Economics of Imperfect Markets, chapter 0, pages 183-212, Springer.
    • Handle: RePEc:spr:conchp:978-3-7908-2131-4_10
    DOI: 10.1007/978-3-7908-2131-4_10
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    References listed on IDEAS

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    1. Bianca De Paoli & Jens Søndergaard, 2017. "Revisiting the Forward Premium Anomaly Using Consumption Habits: A New Keynesian Model," Economica, London School of Economics and Political Science, vol. 84(335), pages 516-540, July.

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    More about this item

    Keywords

    Real Exchange Rate; Adjustment Cost; Contemporaneous Correlation; Nominal Rigidity; Sticky Prex;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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