Investment and trade patterns in a sticky-price, open-economy model
Abstract: This paper develops a tractable two-country DSGE model with sticky prices la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either.
File(s): File format is application/pdf http://dallasfed.org/assets/documents/institute/wpapers/2009/0028.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2009
Note: Published as: Martinez-Garcia, Enrique and Jens Søndergaard (2009), "Investment and Trade Patterns in a Sticky-Price, Open-Economy Model," in The Economics of Imperfect Markets, ed. Giorgio Calcagnini and Enrico Saltari (Berlin: Springer), 183-212.