DSGE models · Sources
Small-open-economy NK sources, papers, and evidence trail
Primary papers, model variants, source notes, and review signals behind the Small-open-economy NK page.
References
Academic and research sources
Peer-reviewed papers, books, and research used to ground model mechanisms or contested interpretations.
[S1] Review of Economic Studies
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
Gali and Monacelli's small-open-economy New Keynesian model.
Academic - Review of Economic Studies - dated 2005
Reference sources
Reference material used for orientation; read primary and academic sources first when claims conflict.
[S2] Reference
Gali and Monacelli (2005) -- Monetary Policy and Exchange Rate Volatility in a Small Open Economy, the canonical SOE-NK treatment with complete pass-through.
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[S3] Reference
Monacelli (2005) -- Monetary Policy in a Low Pass-Through Environment, introduced incomplete pass-through (LCP) into the SOE-NK framework.
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[S4] Reference
Corsetti, Dedola, and Leduc (2010) -- Optimal Monetary Policy in Open Economies, studied welfare-based policy under incomplete markets and LCP.
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[S5] Reference
Justiniano and Preston (2010) -- Bayesian estimation of an open economy DSGE model with incomplete pass-through, demonstrated empirical fit for Canada and Australia.
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[S6] Reference
Schmitt-Grohe and Uribe (2003) -- Closing Small Open Economy Models, provided techniques for inducing stationarity in SOE models.
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[S7] Reference
De Paoli (2009) -- Monetary Policy and Welfare in a Small Open Economy, showed optimal policy departs from strict inflation targeting in the open economy.
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Research footing
Evidence and data
Read inflation, output, exchange rates, import prices, external demand, and risk premia together.
Calibration or measurement
Openness, exchange-rate pass-through, foreign-demand persistence, and risk-premium shocks dominate results.
Boundaries
- Large-country spillbacks are outside the small-economy assumption.
- Currency mismatch needs another balance-sheet block.
- Capital controls are not native to the baseline.
Use guidance
- When sufficient
- Monetary policy analysis, exchange-rate pass-through, and external-demand spillovers in a small open economy with a floating rate and open capital account. The Gali-Monacelli 2005 (RES) framework gives clean forward-looking predictions for the optimal policy trade-off between domestic inflation and the output gap when imported goods enter CPI and the law of one price holds at the border.
- When sketch only
- Use as the open-economy extension of the standard three-equation NK model, not as a model of capital-flow surges, dollarization, or sudden stops. The small-economy assumption rules out spillbacks from domestic policy to the rest of the world. Sterilized intervention, currency mismatch on bank balance sheets, and sovereign risk premia each require a separate block.
- When to switch
- Switch to a model with imperfect capital mobility or portfolio balance (Schmitt-Grohe-Uribe 2003 JIE debt-elastic premium) when the interest-parity condition fails persistently. Switch to a sudden-stop model (Mendoza 2010 AER) when binding collateral constraints and capital reversals define the episode.
- Falsification signal
- Exchange-rate pass-through that is systematically near zero during non-stress periods but spikes or reverses during risk-off episodes violates the model's assumption of stable import-price elasticity. If the domestic inflation response to a 10 percent depreciation swings from near zero to 2 or 3 percent depending on the financial-stress regime, the constant-pass-through parameter is misspecified.
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