Working Paper: CEPR ID: DP3540
Authors: Giovanni Ganelli; Philip R. Lane
Abstract: This Paper discusses some key issues in the application of dynamic general equilibrium analysis to open economy modeling. In the context of the new open economy macroeconomics paradigm, we focus on: (i) the currency denomination of sticky prices; (ii) the role of the current account and net foreign assets; and (iii) the impact of fiscal policy.
Keywords: dynamic general equilibrium; new open economy macroeconomics
JEL Codes: F30; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency denomination of sticky prices (F31) | exchange rate fluctuations influence domestic and foreign demand for goods (F31) |
| PCP (I11) | reduction in eurocurrency price of exports (F31) |
| reduction in eurocurrency price of exports (F31) | increase demand from foreign purchasers (F49) |
| LCP (L00) | income effects rather than substitution effects (H31) |
| permanent increase in government spending (H59) | current account surpluses (F32) |
| current account surpluses (F32) | influences long-run consumption patterns (D15) |
| fiscal policy impacts (E62) | moderated by degree of nominal rigidities (E19) |
| fiscal policy impacts (E62) | moderated by structure of international financial markets (F30) |
| fiscal expansions or contractions (E62) | affect output and consumption in home and foreign economies (F41) |