Determinacy and Learnability of Monetary Policy Rules in Small Open Economies

This paper evaluates under which conditions different Taylor-type rules lead to determinacy and expectational stability (E-stability) of rational expectations equilibrium in a simple New Keynesian small open economy model, developed by Gali and Monacelli (2005). In particular, we extend the Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy to this small open economy framework. Our results highlight an important link between the Taylor principle and both determinacy and learnability of equilibrium in small open economies. More importantly, the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways. A key finding is that, contrary to Bullard and Mitra, expectations-based rules that involve the CPI and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle does not guarantee E-stability. We also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability, yet these rules might not be desirable since they promote greater volatility in the economy.

Examinando algunas disyuntivas de política económica con un modelo estructural

En este documento se intenta dar respuesta, mediante el empleo de un modelo estructural, a tres tipos de interrogantes: las implicancias de una mejora en los procesos productivos, los efectos de un cambio en los niveles de endeudamiento público y los costos en términos del producto de un cambio en la tasa de inflación objetivo. Las simulaciones que arroja el modelo permiten concluir que un incremento permanente de productividad aumenta el nivel de producto (sostenible en el largo plazo) sin generar presiones inflacionarias; una reducción permanente de la deuda pública, manteniendo constante el gasto público, implica un mayor nivel de producto en el largo plazo a costa de una menor producción en el corto plazo y que el costo en términos de producto de una política de reducción de la inflación varía inversamente con el grado de credibilidad de la política monetaria.

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Descripción: Es el primer curso de línea en la carrera de Administración y Negocios Internacionales y responde a un enfoque moderno de la administración estratégica, así como a una visión global del mundo comercial de hoy. Un elemento clave que se busca desarrollar en el estudiante es la conciencia y visión comercial internacional de los negocios a partir de la globalización y el desarrollo de las tecnologías de la información que se viene dando en el mundo. Propósito: El curso tiene como propósito asegurar un sólido fundamento teórico - práctico del amplio panorama de los negocios internacionales, los cuales se realizan bajo diferentes modalidades. Así mismo, brinda al estudiante la oportunidad de familiarizarse con las principales fuerzas internas que enfrenta una empresa en su entorno 1nacional para poder hacer frente a todas aquellas fuerzas externas que le resultan incontrolables pero que debe entenderlas y buscar formas de enfrentarlas cuando se quiere ingresar a mercados externos. El curso desarrolla las competencias generales Pensamiento Innovador y Comunicación Oral, en el nivel de logro 1 y la competencia específica Evaluación de Oportunidades Internacionales en el nivel de logro 1. El curso no tiene pre requisitos

PERUVIAN ECONOMIC ASSOCIATION How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets * Job Market Paper

Abstract This paper analyzes how terms of trade affect aggregate productivity using a two-country monopolistic competitive business cycle model driven by aggregate technology shocks. The inefficiency of the equilibrium implies that each country's productivity is affected by the terms of trade. This introduces a novel mechanism for business cycle synchronization. Moreover, for each country, foreign technology shocks have almost the same effects as domestic technology shocks. The paper also shows how terms of trade movements can lead to excess volatility of consumption and highly persistent productivity. On the quantitative side, the model delivers a degree of business cycle synchronization that is close to the actual comovement of the U.S. economy with the rest of the world. The model also implies that for some small open economies, specially emerging economies, foreign shocks can outperform domestic shocks in explaining their business cycles. Finally, the paper provides a quantification of the influence of the terms of trade on emerging countries' productivity and finds that it can be large. JEL Classification: C67, E23, F12, F41, F43

Gestionando choques de términos de intercambio (Capítulo)

Las economías primario-exportadoras enfrentan con frecuencia choques en sus términos de intercambio. Ello puede comprometer la estabilidad macroeconómica, lo que resalta la importancia de las políticas contracíclicas para estas economías. Sin embargo, la magnitud y la persistencia de estos choques externos plantean desafíos para el diseño de política económica, en especial cuando son adversos o cuando ocurren en presencia de rigideces (nominales o reales) y vulnerabilidades financieras preexistentes. En esos casos, el espacio para acomodar las variaciones en los términos de intercambio a través de políticas contracíclicas es limitado, relegando la mayor parte del ajuste al tipo de cambio. Este capítulo discute estos desafíos desde la perspectiva de la economía peruana

Essays on Macroeconomics

In these essays, I examine (i) the role of terms of trade in emerging countries and (ii) economic efficiency under endogenous information. The first chapter documents a negative relationship between the terms of trade - defined as the ratio of imports to the price of exports - and various macroeconomic variables such as output, consumption, investment and total factor productivity (TFP) in emerging economies. The second part of this chapter presents a small open economy business cycles model featuring intermediate imported inputs, monopolistic competition and input-output linkages. A calibrated version of the model reproduces the empirical facts documented in the first part. In particular, the model replicates the negative link between the terms of trade and TFP, providing an explanation to a long-standing puzzle in the business cycle literature. In addition, I show how terms of trade shocks help to increase the volatility of consumption above the volatility of output. The second and third chapters, which are part of an ongoing work with Venky Venkateswaran, examine economic efficiency under costly private information. In the second chapter, my co-author and I study the efficiency of equilibrium outcomes in models where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing or quantity decisions. Using this framework we show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal, which is the case when firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, however, their actions exhibit a inefficiently high sensitivity to their private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. In terms of policy, we show that the standard full information response to market power-related distortions can reduce welfare under endogenous uncertainty. We also show how our analysis applies to coordination games in general, using the beauty contest framework. In the third chapter my co-author and I show that the same inefficiencies characterized in the previous chapter take place in standard business cycle models. In a RBC framework with dispersed information about technology shocks, distortions due to market power have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. In a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information

Essays on Macroeconomics

In these essays, I examine (i) the role of terms of trade in emerging countries and (ii) economic efficiency under endogenous information. The first chapter documents a negative relationship between the terms of trade - defined as the ratio of imports to the price of exports - and various macroeconomic variables such as output, consumption, investment and total factor productivity (TFP) in emerging economies. The second part of this chapter presents a small open economy business cycles model featuring intermediate imported inputs, monopolistic competition and input-output linkages. A calibrated version of the model reproduces the empirical facts documented in the first part. In particular, the model replicates the negative link between the terms of trade and TFP, providing an explanation to a long-standing puzzle in the business cycle literature. In addition, I show how terms of trade shocks help to increase the volatility of consumption above the volatility of output. The second and third chapters, which are part of an ongoing work with Venky Venkateswaran, examine economic efficiency under costly private information. In the second chapter, my co-author and I study the efficiency of equilibrium outcomes in models where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing or quantity decisions. Using this framework we show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal, which is the case when firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, however, their actions exhibit a inefficiently high sensitivity to their private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. In terms of policy, we show that the standard full information response to market power-related distortions can reduce welfare under endogenous uncertainty. We also show how our analysis applies to coordination games in general, using the beauty contest framework. In the third chapter my co-author and I show that the same inefficiencies characterized in the previous chapter take place in standard business cycle models. In a RBC framework with dispersed information about technology shocks, distortions due to market power have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. In a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information