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Working Paper
Technology Choice and the Long- and Short-Run Armington Elasticity
This paper studies the international transmission of productivity shocks when the Armington elasticity is endogenized through firms' technology choice. With costly adjustment, technology choice allows for a low short-run elasticity and a high long-run elasticity. I provide analytical results which demonstrate how technology choice provides a solution to the Backus-Smith puzzle - the observed negative correlation between relative consumption and the real exchange rate. I then embed technology choice in a quantitative model of international trade with heterogeneous firms and endogenous producer ...
Working Paper
Can Trend Inflation Solve the Delayed Overshooting Puzzle?
We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price ...
Working Paper
Optimal monetary policy in a two country model with firm-level heterogeneity
This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation.
Working Paper
Pricing-to-market and optimal interest rate policy
I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output.