The Research Of New Open Economy Macroeconomics Theory

The world economy is facing great changes at the cross of century. Economic globalization, collectivization, integration, as a sort of tide and popular trend, make significant influences to the world economy. Especially at the beginning of this new century together with the emergence of Euro dollar and the development of APEC, cooperation and coordination among all the countries around the world are becoming more and more popular, and it deepens the economic intercourse and relationships in the world. Therefore both economic scholars and decision-makers of all the governments have to analyze their domestic economic issues on the framework of open economy.As one of main streams of macroeconomics, international economics includes many issues that have high correlations with the modern real economic life, so lucubrating international economic theory has become the necessary work for the governments to make right macroeconomic policies. Secondly, international economics is one of the main areas and research keystones in the development of macroeconomic theory. International economics is also called open economy macroeconomics which includes the study about exchange rate, international trade, investment, international fiscal and monetary policy and so on. Some mature models and theories of open economy macroeconomics appeared in 1960s. For example Mundell-Fleming model has given the basic relationships among monetary policy, fiscal policy and exchange rate, which is still the main reference for the governments to exert the macroeconomic policy. However, these early models lack microfoundations and ignore the interactions among production, consumption and exchange rate. Until the medium term of 1990s, Obstfeld and Rogoff built a bridge between the rigor of the microfoundations and the descriptive plausibility of the classic contributions of early models, and set up a more general intertemporal monopolistic competition model. This new framework based on monopolistic competition and sticky nominal prices integrates much macroeconomic dynamics, which is called "New Open Economy Macroeconomics".Under the direction of the tutor and the help of my classmates, the author of this paper has comprehensively studied and investigated the new open economy macroeconomics since 2003. During the past nearly three years we havesystematically investigated all theories and models of open economy economics after 1960s, analyzed and summarized the development of main-stream thoughts, deeply studied all representative works and papers of new open economy macroeconomics formed and developed after the medium-term of 1990s, taken the real economic issues into consideration, then formed our own thoughts and viewpoints gradually. Since implementing the research work at 2003, we have gained some achievements and working papers, part of which have been received by national outstanding economic journals (such as , and so on). As my PH.D thesis, this paper is just formed on the base of these research achievements mentioned above.There are three parts in this paper: the first part, covering the first two chapters, is a introduction and summary of all the development of open economy economics; the second part, from Chapter 3 to Chapter 5, mainly introduces and develops a few basic models of new open economy macroeconomics, which covers my personal research work; the third part, including the last chapter, introduces some models for international monetary policy analysis and shows the frontier of new open economy macroeconomics and the direction of its development.Chapter 1 is a summary of the whole early open economy macroeconomics theory developed after World War Two. Postwar following the development and integrity of macroeconomics system the close-economy theory based on Keynesian model extended to the open economy, such as Mundell-Fleming model. These early open economy macroeconomics models gave a stable base for the government to implement economic policy. Then Dornbusch integrated expectations into his analysis of the economy and explained overshooting of exchange rate preferably. However these models have the same shortcoming of lacking of rigorous microfoundations, so coherent analysis of policy would lead to the wrong conclusions. At the end of this chapter we introduce two international economic models with microfoundations.In Chapter 2 we briefly outline the dynamic general equilibrium two-country model based on monopolistic competition and sticky nominal prices by Obstfeld and RogoffC 1995) that is the foundation stone of new open economy macroeconomics and provides a new basic framework for the deep study and further research. Then we offer a systematical survey of the recent ten years' literature from the different aspects including nominal rigidities, market segmentation, preferences and so on, and giveour evaluations and viewpoints according to its effects and significance at last.In Chapter 3, we develop the two-country economic model based on one-period sticky price in some different aspects. At first, we discuss the impacts that incorporating the change of tariff to the standard model causes to production, consumption, the exchange rate and the effects to the welfare of each country. Then we also empirically analyze the relationship among tariff, exchange rate and inflation. Secondly, we analyze the effects to international transmission mechanism and the influence to welfare with incorporating capital into production process. Under sticky price unanticipated monetary expansion will stimulate the investment in the short run and increase the capital stock in the long run, then bring along production and consumption and markedly magnify the welfare effects of expansive monetary policy at last. Finally, we turn our attention to the impacts that the presence of local currency pricing (LCP) causes to the international transmission mechanism under the different international capital market. Through the theoretical calculation and simulation we find the presence of LCP just influences the nominal economic variables under the complete real capital market, so it only increases nominal exchange rate volatility and can't make any impacts to the expenditure switch effect between the two countries. But under the complete nominal capital market extending the degree of LCP would lower the expenditure switch effect and cause a significant influence to the productions and consumptions of the two countries.Chapter 4 extends the analysis to the small country economic model based on monopolistic competition and nominal rigidities. We begin with introducing a small country open economy model in Obstfeld and Rogoff (1996) that explains the overshooting of the exchange rate, then turn to consider the impacts that incorporating capital to production causes to the international transmission mechanism. The introduce of capital weakens the importance of labor in production and reduces the negative effects to individual's utility of labor supply, so we can get the inverse relationship between the capital share in income and inflation. The data cover 17 countries in the OECD economies and are a cross-section over 2000-2002. Through correlation analysis and regression we get the inverse relationship between the capital share and inflation, so the empirical evidence supports the main prediction of the model.Chapter 5 discusses the stochastic open economy models under uncertainty. Webegin with the stochastic open economy models of Obstfeld and Rogoff (1998,2000a, 2002) under uncertainty of productivity and money supply which allows us to analyse the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Then we turn our focus to analyzing the effects of the uncertainty of tariff on expected exchange rate and expected consumption, and focuses on the welfare effects of tariff volatility. At last we compare the levels of welfare the different combinations of tariff and monetary policies cause. The tariff union keeps the term of trade fixed, but enlarges the volatility of consumption per capita, therefore leads to some negative effects to the welfare. The monetary union has an indeterminate influence that depends on the consumption elasticity to money supply. Comparing two monetary regimes of fixed and float exchange rate we find the optimal monetary policy under both regimes can counteract the effects of tariff and improve the welfare of two countries.In Chapter 6, we begin with a framework for international policy analysis of Corsetti and Pesenti (2001) which is based on the model of Obstfeld and Rogoff (1998) . The welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade. An unanticipated exchange rate depreciation can be beggar-thyself rather than beggar-thy-neighbor, as gains in domestic output are offset by deteriorating terms of trade. Smaller and more open economies are more prone to suffer from inflationary shocks. Fiscal shocks are generally beggar-thy-neighbor in the long run; in the short run they raise domestic demand at given terms of trade, thus reducing the welfare benefits from monetary expansions. Benigno (2002) utilize the latter model in order to address the issue of international monetary policy coordination. In a non-cooperative equilibrium the monopolistic allocation prevails in both countries, because of the incentive to use strategically the terms of trade. In a cooperative solution where both policymakers eliminate the externalities given by the terms of trade, the competitive allocation is reached. At last we also discuss the staggered price-setting model of Clarida et al. (2002).