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Technical note on "The real exchange rate in sticky price models: does investment matter?"
This technical note is developed in part as a mathematical companion to the paper ?The Real Exchange Rate in Sticky Price Models: Does Investment Matter?? (GMPI working paper no. 17). Our two-country model incorporates capital accumulation with adjustment costs, variable capital utilization and investment-specific technological shocks. Nominal rigidities and monopolistic competition distort the goods markets of each country and allow monetary policy to have real effects. We investigate two different international pricing scenarios, local-currency pricing (where the law of one price fails) and ...
Investment and trade patterns in a sticky-price, open-economy model
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 ...