The Benchmark Paradigm
The Benchmark Paradigm
The benchmark New Keynesian model comprises three globalization features:1. International labor mobility: both inward and outward movements of labor. The presumption is that labor flows tend to mitigate wage demands because they introduce a substitution between domestic and foreign labor. 2. International trade in goods. The presumption is that trade leads to specialization in domestic production and diversification in domestic consumption. Therefore, trade tends to weaken the link between domestic production and domestic consumption. As a result, the effect of the fluctuations of domestic production on inflation is also weakened by the presence of international trade in goods. 3. Financial integration with the rest of the world. International trade in financial assets allows households to smooth their consumption over time and over states of nature. Such a model may be used to simulate monetary policies during The Great Moderation from 1985 to 2007.
Keywords: Consumption smoothing, Price rigidity, Globalization and monetary policy
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