Working Paper: NBER ID: w7313
Authors: Maurice Obstfeld; Kenneth Rogoff
Abstract: The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Despite the potential interplay between imperfections due to sticky wages and monopoly, the optimal monetary policy rule has a closed-form solution. To motivate our model, we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local-currency pricing.
Keywords: No keywords provided
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Regime (E42) | Welfare (I38) |
| Monetary Regime (E42) | Expected Output (Y10) |
| Monetary Regime (E42) | Expected Terms of Trade (F14) |
| Nominal Rigidities (E19) | Observed Correlations (Terms of Trade and Exchange Rates) (F31) |