Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules

7. Impulse-Response Analysis

5. The domestic output gap, PPI inflation and nominal interest rates decrease before all endogenous
variables return to their zero-inflation steady-state values in response to an impulse on the monetary
policy shocks (Figure 5). The TOT augment before they return to their zero-inflation steady-state
value. There is also an impact on all foreign endogenous variables, which is of the same sign.

6. The foreign output gap, PPI inflation and nominal interest rates decrease before all endogenous
variables return to their zero-inflation steady-state values in response to an impulse on the monetary
policy shocks (Figure 6). The TOT plummet before they return to their zero-inflation steady-state
value. There is also an impact on all domestic endogenous variables, which is of the same sign.

Except for the aggregate productivity shocks, the deviation of the domestic output gap from the zero-
inflation steady state is higher than the one of the foreign output gap in case of home-made disturbances.
However, the picture is ambiguous in case of PPI inflation and nominal interest rates. As expected, none
of the shocks discussed above is able to raise output above its flexible-price equilibrium level, neither at
home nor abroad. Instead, output in both countries drops in response to all entailed impulses before it
eventually converges.

The negative influence of the productivity shocks on the economy contradicts one of the central impli-
cations of the standard RBC model, namely a positive correlation of productivity (shocks) and output.
Findings for a closed-economy New Keynesian model, which are similar to the present results, are re-
ported, e.g., in Gall (2002, pp. 17-18). Empirical studies support this view and show in addition
that technology shocks do not seem to be a significant source for the creation of business cycles at all,
which contradicts another central implication of the standard RBC model, namely that technology shocks
ought to be the dominant driving force for the creation of business cycles (see Gai1∕Rabanai 2004, pp.
36-39).

The subsequent property of the monetary policy shocks is also worth mentioning. Contrary to Corsetti/
PeseNti (2001, pp. 435-439), negative realizations of v,v*, which correspond to expansionary shocks,
always have a ”prosper thyself” and ”beggar thy neighbor” effect since they influence the TOT beneficially
for the home (foreign) country’s resident households by decreasing them below (raising them above) their
zero-inflation steady-state values. In addition, this effect would induce a rise of both domestic and foreign
output above their flexible-price values.³⁰

Finally, statistical moments, correlations, and autocorrelations of the simulated endogenous variables are
given in Tables 1 to 3 below.

Table 1: Moments of simulated variables

³⁰Note, however, that monetary policy shocks in Corsetti/Pesenti (2001) are modeled in terms of permanent and unex-
pected changes in money supply.

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