Transmission mechanisms of real stochastic shocks in a small open economy

• Published in: International economics and economic policy Vol. 10; no. 2; pp. 217 - 245
• Main Authors: Giménez, Eduardo L., Martín-Moreno, José María
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer-Verlag 01.06.2013; Springer; Springer Nature B.V
• Subjects: Analysis; Business cycles; Calibration; Consumption; Economic aspects; Economic Policy; Economics; Economics and Finance; Equilibrium; Expenditures; Expenditures, Public; Government spending; International Economics; Investments; Macroeconomics/Monetary Economics//Financial Economics; Original Paper; Productivity; Public Finance; Studies; Time series; Variables; Volatility; Spain; F41; E52; E32; Cash-in-advance constraint; E37; Small open economy; Government expenditure shock; E47; Real business cycle theory; Productivity shock
• ISSN: 1612-4804; 1612-4812
• DOI: 10.1007/s10368-012-0206-7

We offer a qualitative evaluation of the transmission mechanisms of two real shocks, a productivity shock and a government expenditure shock in Walrasian business cycle models. The analysis is developed in a monetary small open economy business cycle model, a set-up general enough to study the effects of the two shocks on both real and nominal variables. Qualitative and graphical displays indicate properties of Real Business Cycles that are able to reproduce observed cyclical patterns, independently of the calibration used for different economies. These qualitative findings match the quantitative results found in the literature, and rationalize some disparity findings (such as the cyclicity pattern of prices) and failures (such as the Dunlop–Tarshis observation). We suggest that understanding the underlying qualitative intuitions of these models may be of great help in tackling new puzzles in this area.