انعطاف ناپذیری های اسمی، سیاست های پولی و نرخ های ارز در یک اقتصاد کوچک باز

In this paper I set up a sticky price small open economy model with transaction costs and discuss the behavior of exchange rates as well as price. This paper shows that the sticky price model partly succeeds in generating the hump-shaded response of a real exchange rate to a positive monetary shock. It also shows that the volatility of exchange rates increases as the degree of nominal rigidities increase.

In international finance, many empirical studies on the effects of monetary policy have been performed with U.S. data and found that the estimated impulse responses of variables to innovations in monetary aggregates are consistent with traditional monetary analyses (Sims 1992; Clarida and Gall 1994; Eichenbaum and Evans 1995). But some empirical studies employing Vector Autoregressions (VARs) have documented puzzles such as the exchange rate puzzle and the price puzzle for small open economies. For example, Sims (1992) found these puzzles by analyzing five major industrial countries with six variable VARs. Also, Grilli and Roubini (1995) who analyzed the G-7 countries, found that a contracfionary home monetary policy shock generates home currency depreciations for every country except the U.S. Cushman and Zha (1997), however° argue that these puzzles derive from the recursive approach to monetary policy identification, which does not make sense for the small open economies. As monetary authorities in such economies are likely to respond quickly to foreign variables, the assumption that the interest rate or monetary aggregate innovations are independent is inappropriate in small open economies. Cushman and Zha (1997) address these empirical puzzles for small economies following Gordon and Leeper (1994) and Sims and Zha (1995) who used a structural VARapproach with an explicit monetary function to eliminate the interest rate puzzle and price puzzle found for the closed economies such as the U.S. They used this structural VAR approach for the Canadian case and found that these puzzles disappear; that is, the nominal and real exchange rates appreciate to a contractionary domestic monetary policy. Though there have been some attempts to explain the excessive variation of exchange rates by setting up a two-country monetary general equilibrium model, only a few attempts have been made to explore them in a small open economy context. 1 Notwithstanding the empirical success in remedying these puzzles, only a few attempts have been made to explain them with the setup of an explicit theoretical model. This is because it is not easy to eonstrnct a model that fits the empirical facts, that is, a model that produees sufficient variation in exchange rates without excessive variation in expected consumption. For a two-country economy, the international stochastic dynamic general equilibrium models, such as that of Sehlagenhauf and Wrase (1995), in which money is introduced simply by adding cash-in-advance constraints or a transaction role for money with flexible prices, fail to explain the exchange rate movements. For a small open economy, Cardia (1991), who tried to evaluate the flexible price international finance model with various shocks, could not address the exchange rate variability and the exchange rate puzzles because she assumed that there was only one traded good and thus PPP always holds. In this one-good model, there is no nominal exchange rate puzzle because the nominal exchange rate equals the domestic price by assumption. The recent international finance models, such as Rebelo (1997) and Uribe (1997), with flexible prices and continuously clearing market, explore the stabilization program observed in Latin America. Though these models are somewhat useful in. discussing the inflationary economy, they fail to address the sluggish price and relatively large output adjustments observed in Europe and East Asia by exaggerating price level variability. Recent attempts to reconcile RBC(Real Business Cycle) models with New Keynesian Macroeeonomics are attractive, because the "sticky-price" dynamic general equilibrium model can be quantitatively evaluated. For example, Obsffeld and Rogoff (1996) suggested a sticky price model as a possible way to explain the monetary effects on exchange rates. This paper follows Obstfeld and Rogoff (1996) by utilizing the tradables and nontradables sector in a small open economy.I begin by setting up a "sticky-price" dynamic general equilibrium model with monopolistic competition in a nontraded goods sector. Then, using this improved model, I investigate the following questions. First, I explore whether this model can generate a long and persistent hump-shaped exchange rate effect of monetary shocks. Second, I discuss whether this model can give rise to volatile exchange rate movements. Third, I explore whether the co-movements of exchange rates and other real variables are consistent in the data. The propagation mechanisms as well as the implications contained in such a monopolistic competition model are different from those of the flexible price small open economy. In the nominal rigidities model, the eountercyclical response of a markup, which is the ratio of price to marginal cost, plays a pivotal role in generating the persistent and volatile exchange rate effects of monetary shocks. The countercyclical response of endogenous markups through price rigidity can generate depreciation effects of expansionary monetary shocks. In particular, the degree of markup and real variable become stronger as the degree of price stickiness increases. In addition, I discuss in brief the monopolistic competition model with sticky prices in a two-country economy model based on Jung (1995). The basic structure of the two-country economy is the same as the nontraded goods sector in a small open economy. I discuss the quantitative implications of the model and compare its implications with those of the small open economy. The main findings of this paper can be summarized as follows. First, when there exists a substantial degree of price rigidity in the economy, expansionary monetary shocks to the home country lead to persistent and sharp depreciations of home real and nominal exchange rates. The result that the effects of monetary shocks on exchange rates last long enough is in sharp contrast with the flexible price model's result, which emphasizes the liquidity effects but fails to find such long and persistent effects of monetary shocks. Second, the degree of exchange rate depreciations on positive monetary shocks increases with the degree of price stickiness. At the same time, the variabilities of real variables also increase because more and more firms adjust their prices through the rule of thumb instead of optimal pricing rules. Third, the correlation between nominal and real exchange rate increases as the nominal rigidity increases. This nicely matches with the data. Finally, the main results of the small open economy which I have discussed extends to the two-country economy model. The organization of the paper is as follows. In Section 2, the small open economy model with sticky prices is presented. In Section 3, the equilibrium and the impulse response of some real variables to monetary shocks are analyzed. Various second moments of the model are compared with those of the data in Section 4. In Section 5, the model is extended to thetwo-country economy model and its implications are discussed. Section 6 concludes the paper.

This paper investigates whether the monopolistic competition model with sticky prices can generate persistent exchange rate effects from monetary shocks, and whether it can have volatile exchange rate movements. Consumption for domestic goods decreases and real exchange rates appreciate in response to a positive home monetary shock when there is little price stickiness in the economy. But when price becomes more sticky, the demand for domestic consumption goods increases and its increase becomes larger than that of foreign consumption goods. So the real exchange rate depreciates more persistently following a positive home monetary shock since the markup responds more negatively to the shock. The volatility of exchange rates also increases as the degree of price stickiness increases. The serial correlation of variables and the correlation between real and nominal exchange rates match well with the data when the degree of price stickiness is high. In the sticky price model, the correlation between nominal and real exchange rates increases as the nominal rigidity increases and it nicely matches to the data. In the two-country world model, the real exchange rate depreciates more persistently following a positive home monetary shock because the markup responds more negatively to the shock as in the small country world model. The volatility of exchange rates also increases as the degree of price stickiness increases. This finding contrasts sharply with the results of Schlagenhauf and Wrase (1995), who emphasize liquidity effects but fail to find long and persistent exchange rate effects from monetary shocks. Overall, I find that the markup responds negatively to a positive home monetary shock and positively to a positive home real shock. This plays a pivotal role in generating a persistent exchange rate effect from monetaryshocks as well as the volatile movements of the exchange rates. Despite the benchmark model's successes in generating the hump-shape impulse response of real exchange rates to a positive home monetary shock, it failed to explain the excessive volatility of exchange rates. This requires further study. In the future, it is desirable to incorporate the sticky price property with a habit formation and look at the effects of a monetary shock on the exchange rate as well as on consumption.