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Understanding Global CrisesAn Emerging Paradigm$
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Assaf Razin

Print publication date: 2015

Print ISBN-13: 9780262028592

Published to MIT Press Scholarship Online: May 2016

DOI: 10.7551/mitpress/9780262028592.001.0001

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PRINTED FROM MIT PRESS SCHOLARSHIP ONLINE (www.mitpress.universitypressscholarship.com). (c) Copyright The MIT Press, 2022. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in MITSO for personal use.date: 25 June 2022

The Benchmark Paradigm

The Benchmark Paradigm

(p.137) 11 The Benchmark Paradigm
Understanding Global Crises

Assaf Razin

The MIT Press

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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