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A Small Open Economy as a Limit Case of a Two-country New Keynesian DSGE Model: a Bayesian Estimation with Brazilian Data

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  • Marcos Antonio C. da Silveira

Abstract

We build a two-country version of the DSGE model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain 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, so that there is no more the direct relationship between marginal cost and output gap that characterizes the closed economies. Unlike most part of the literature, we derive the small domestic open economy 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. Using the Bayesian approach, the small-economy case is estimated with Brazilian data and impulse-response functions are build to analyse the dynamic effects of structural shocks. O artigo desenvolve uma versão para dois países do modelo de equilíbrio geral dinâmico e estocástico em Gali & Monacelli (2005), o qual estende para uma pequena economia aberta o modelo novo keynesiano usado como ferramenta para análise de política monetária em economias fechadas. Uma importante característica do modelo é que os termos de troca entram diretamente na curva de Phillips novo Keynesiana como uma segunda variável pressionando os custos e a inflação, de forma que não mais existe a relação direta entre custo marginal e hiato do produto encontrada nas economias fechadas. Diferente da maior parte da literatura, a pequena economia aberta é derivada como um caso-limite do modelo para dois países, em vez de supor que as variáveis externas seguem processos exógenos. Este procedimento preserva o papel desempenhado pelas fricções nominais do resto do mundo na transmissão dos choques externos sobre a economia pesquena. Usando uma abordagem bayesiana, o caso-limite do modelo para uma pequena economia é estimado com dados brasileiros e funções impulso-resposta são construídas para análise dos efeitos dinâmicos dos choques estruturais.

Suggested Citation

  • Marcos Antonio C. da Silveira, 2015. "A Small Open Economy as a Limit Case of a Two-country New Keynesian DSGE Model: a Bayesian Estimation with Brazilian Data," Discussion Papers 0175, Instituto de Pesquisa Econômica Aplicada - IPEA.
  • Handle: RePEc:ipe:ipetds:0175
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    2. Frank Smets & Raf Wouters, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 161-183.
    3. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    5. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2007. "New Keynesian Models for Chile in the Inflation-Targeting Period," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 13, pages 507-546, Central Bank of Chile.
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