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Open-Economy models are central to the discussion of the trade-offs monetary policy faces in an increasingly more globalized world (e.g., Marinez-Garcia & Wynne, 2010), but bringing them to the data is not without its challenges. Controlling for misspecification bias, we trace the problem of uncertainty surrounding structural parameter estimation in the context of a fully specified New Open Economy Macro (NOEM) model partly to sample size. We suggest that standard macroeconomic time series with a coverage of less than forty years may not be informative enough for some parameters of interest to be recovered with precision. We also illustrate how uncertainty also arises from weak structural identification, irrespective of the sample size. This remains a concern for empirical research and we recommend estimation with simulated observations before using actual data as a way of detecting structural parameters that are prone to weak identification. We also recommend careful evaluation and documentation of the implementation strategy (specially in the selection ofobservables) as it can have significant effects on the strength of identification of key model parameters. [ABSTRACT FROM AUTHOR]

To the extent that oil imports may be relevant to the international dimension of policy, we study the transmission of shocks to open economies dependent on oil within a NOEM framework through a DSGE model of a small open economy with flexible prices, staggered price setting and local currency pricing. For this purpose we introduce imports of oil as a new intermediate good needed to produce the final good and, apart from the usual exogenous shocks when a small open economy is being modeled, we consider an uncovered interest-rate parity shock, a technology shock and an oil price shock. A second-order accurate solution method is used to solve numerically a calibrated model for Portugal and Spain and the simulation results are compared with historical data, showing similar volatilities and expected dynamic responses to exogenous shocks. The model is computed with an optimized Taylor-style interest rate rule that includes real exchange targeting, thus arguing in favour of an international dimension of monetary policy. [ABSTRACT FROM AUTHOR]

We study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple, two-country, New Keynesian framework under both fixed and flexible exchange rates. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. [ABSTRACT FROM AUTHOR]

This study analyses the consequences of productive government spending on the international transmission of fiscal policy. A standard result in the new open economy macroeconomics literature is that a fiscal shock depreciates the exchange rate. I demonstrate that the response of the exchange rate depends on the productivity of government spending. If productivity is sufficiently high, a fiscal shock appreciates the exchange rate. It is also shown that the introduction of productive government spending increases both domestic and foreign welfare, when compared with the case where government spending is wasted. This is because productive government spending has a positive effect on private consumption in both countries in a two country NOEM model. [ABSTRACT FROM AUTHOR]

The bulk of evidence on the lack of international risk sharing is based on regressions of idiosyncratic consumption growth on idiosyncratic output growth. This paper argues that the results from such regressions obtained from international data are, however, not directly comparable to those based on regional data: the standard practice of running such regressions on international data fails to account for persistent international differentials in consumer prices, whereas—implicitly—most of the literature based on regional data has accounted for these differences. When risk sharing regressions are set up in conceptually the same way in international and regional data sets, the estimated coefficients are also very similar. To explore this result further, we adapt the variance decomposition of Asdrubali et al. (Q J Econ 111:1081–1110, ) to allow for deviations from purchasing power parity across countries. While quantity (income and credit) flows are the dominant channel of risk sharing among regions, relative consumption and output price (internal terms of trade) fluctuations account for the bulk of the deviation from the complete markets outcome in international data. To the extent that persistent differences in consumer prices are an indication of goods market segmentation, our findings provide empirical evidence for the proposition by Obstfeld and Rogoff (NBER Macroeconomics Annual 2000, ) that segmented international goods markets rather than asset market incompleteness may account for the (apparent) lack of risk sharing between countries. [ABSTRACT FROM AUTHOR]

How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell–Fleming model, monetary policy reveals ‘beggar-thy-neighbour’ effects. Yet, empirical evidence from VARs indicates that US monetary policy has positive international transmission effects on both foreign (non-US G-7) output and aggregate demand. In this paper, I show that a two-country dynamic general equilibrium model with sticky prices can account for these ‘stylized facts’ if we introduce international asymmetries in the price-setting behaviour of firms insofar as home (US) firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the US in the local currency of the export market (local-currency pricing). Copyright © 2006 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

Within only a few years, the new open economy macroeconomics (NOEM) has emerged as a potential rival to the Mundell-Fleming framework, as modified by Dornbusch and others in the 1980s and 1990s using linear-quadratic models, as the dominant analytical framework in the study of open economies. This paper reviews some of the main developments in this literature. It offers a critical appraisal of its contributions to date and discusses potential pitfalls of taking a pure NOEM approach by dismissing work not based in explicit utility maximization as "ad hoc.'' The paper proposes broadening the NOEM literature to include consideration of heterogeneities within and across open economies. In light of the complexities involved in modeling heterogeneous agents or structures, the field of open economy macroeconomics may stand to gain from the pursuit of an impure NOEM. Work along these lines would de-emphasize dynamics, general equilibrium, and explicit optimization in favor of a focus on the true innovation of the NOEM literature, which has been highlighting the crucial importance of accounting for imperfect competition and price and wage rigidities in macroeconomic theories of open economies. [ABSTRACT FROM AUTHOR]

This paper explores the implications of international location of production for the optimal design of monetary policy in a framework that allows for price discrimination across international markets. By introducing multinational production in a dynamic open economy, the paper shows that optimal monetary rules do not react to foreign cyclical conditions. The paper further shows that non-cooperative monetary rules cannot restore the flexible price allocation while international monetary cooperation can do so. Copyright © 2004 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]