Money and the Open Economy Business Cycle: A Flexible Price Model
Working Paper 1967
DOI 10.3386/w1967
Issue Date
This paper develops an open-economy model of the business cycle. The
nominal prices in the model are flexible and monetary nonneutrality is
developed using information confusion about the sources of disturbances to
demand coupled with differential persistence of demand shocks. Firms use
inventories to smooth their production, and consumers follow a stochastic
permanent income expenditure function. The major implication of the model
is that unperceived monetary disturbances improve the terms of trade and
increase real output in contrast to sticky price models in which the terms
of trade deteriorates. This implication of the model is examined
empirically.