Dynamics Of A Sticky Price Small Open Economy Facing Technology Shocks: Why Be Open?

摘要

This article presents a small open economy model which is a part of the world that consists of a continuum of infinitesimal open economies. New Keynesian Investment Saving Line (IS) and Phillips curves are derived for the small open economy and the rest of the world. For five different policies, (i.e. domestic inflation targeting, consumer price index (CPI) inflation targeting, exchange rate peg, domestic inflation Taylor rule and CPI inflation Taylor rule) the effects of domestic and world technology shocks are analysed. The degree of openness is discussed and the effect of openness is addressed by comparing the impulse responses of a small open economy and closed economy that face productivity shocks.