Master Thesis - Humboldt-Universität zu Berlin

the households behavior with respect to consumption, investment, and labor
supply decisions.
3 Literature
From the modeling perspective, NOEM can be seen as an extensions on a New
Keynesian closed economy (e.g. Gali (2002)). It uses microeconomic RBC
methodology to model the optimization function of the representative agent
and expectations, as well as nominal and real rigidities to model frictions in
the market. The theoretical foundations of the NOEM differ mainly with
respect to the assumptions of the price setting mechanism for exported and
imported goods, the nature of the goods being traded and their distribution
in the domestic market, the nature of the international capital markets,and
the consumer bias for domestically vs. imported goods. In addition, different
stochastic shocks complement the DSGE models to explain the fluctuations
in the main economic indicators.
The challenge to match New Keynesian models to the empirical evidence has
prompted academics and researchers to look for adequate optimization tools
that can fully account for the data. Building on Leeper and Sims’s (1994) fullinformation
maximum-likelihood methods and Schorfheide’s (2000) Bayesian
techniques, Smets and Wouters (2003) successfully estimate an optimizationbased
DSGE model of the Euro Area. Significant contribution is brought by
Christiano, Eichenbaum, and Evans (2005) in explaining the monetary policy
shocks. Similar achievements contributed to the DSGE models being used
intensively for the analysis of the optimal monetary policy and of international
policy coordination.
While closed economy studies have been quite abundant, there is relatively
little empirical work on open economy. Recently, Bergin (2004) developed a
two-country model that combines features of international real business cycle
models with the NOEM; Adolfson, Laséen, Lindé, and Villani (2005) extend
a model with imperfect international risk sharing that follows the framework
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