Working Paper: NBER ID: w10356
Authors: Paul R. Bergin
Abstract: This paper advances the new open economy macroeconomic (NOEM) literature in an empirical direction, estimating and testing a two-country model. Fit to U.S and G-7 data, the model performs moderately well for the exchange rate and current account. Results offer guidance for future theoretical work. Parameter estimates lend support to some common assumptions in the theoretical literature, such as local currency pricing and risk sharing. Estimates are found for key parameters commonly calibrated in the theoretical literature, such as the elasticity of substitution between home and foreign composite goods, and the response of a country risk premium to the net foreign asset position. Results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks, as recently hypothesized. Further, results suggest that inserting explicit interest rate parity shocks into a NOEM model may be more helpful in explaining movements in the current account than the exchange rate.
Keywords: No keywords provided
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NOEM model parameters (C51) | exchange rate and current account dynamics (F32) |
| local currency pricing (F31) | exchange rate movements (F31) |
| elasticity of substitution between home and foreign goods (F29) | theoretical assumptions in literature (C20) |
| deviations from interest rate parity (F31) | shocks to marginal utility (D11) |
| financial shocks (F65) | capital account (F32) |
| capital account (F32) | current account adjustments (F32) |
| interest rate parity shocks (E43) | current account dynamics (F32) |