Working Paper: NBER ID: w1317
Authors: Alan C. Stockman; Ai Tee Koh
Abstract: This paper shows how open-economy implications of alternative business-cycle models can be used to discriminate between those models. Open-economy versions of two well-known models are presented: a model with predetermined nominal wages and a model in which nominal disturbances are misperceived as real disturbances. In the former model applied to a small economy with flexible exchange rates, an unanticipated increase in the money supply increases output of both traded and nontraded goods, lowers the relative price of nontraded goods, and inducesa current-account surplus. In the latter model, an unperceived increase in the money supply increases output of nontraded goods but reduces output of traded goods, raises the relative price of nontraded goods, and induces a current-account deficit.
Keywords: business cycles; open economy; monetary policy; current account
JEL Codes: E31; E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated increase in the money supply (E51) | increase in output for both traded and nontraded goods (F49) |
| unanticipated increase in the money supply (E51) | lowers the relative price of nontraded goods (F16) |
| unanticipated increase in the money supply (E51) | induces a current account surplus (F32) |
| unperceived increase in the money supply (E59) | raises output of nontraded goods (H49) |
| unperceived increase in the money supply (E59) | reduces output of traded goods (F16) |
| unperceived increase in the money supply (E59) | raises the relative price of nontraded goods (F16) |
| unperceived increase in the money supply (E59) | induces a current account deficit (F32) |