Abstract
This paper develops a small-scale two-country model following the new open economy macroeconomics paradigm. Under autarky, the model specializes to the familiar three-equation New Keynesian dynamic stochastic general equilibrium (DSGE) model. We discuss two challenges to successful estimation of DSGE models: potential model misspecification and identification problems. We argue that prior distributions and Bayesian estimation techniques are useful to cope with these challenges. We apply these techniques to the two-country model and fit it to data from the United States and the Euro area. We compare parameter estimates from closed and open economy specifications, study the sensitivity of parameter estimates to the choice of prior distribution, examine the propagation of monetary policy shocks, and assess the model's ability to explain exchange-rate movements.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
