International macroe.. - Free

Chapter 9The New InternationalMacroeconomicsThe new international macroeconomics are a class of theories that embedimperfect competition and nominal rigidities in a dynamic generalequilibrium open economy setting. In these models, producers havemonopoly power and charge price above marginal cost. Since it is optimalin the short run for producers to respond to small ßuctuationsby changing output, these models explain why output is demand determinedin the short run when current prices are predetermined dueto some nominal rigidity. It follows from the imperfectly competitiveenvironment that equilibrium output lies below the socially optimallevel. We will see that this feature is instrumental in producing resultsthat are very different from Mundell—Fleming models. BecauseMundell—Fleming predictions can be overturned, it is perhaps inaccurateto characterize these models as providing the micro-foundationsfor Mundell-Fleming.These models also, and not surprisingly, are sharply distinguishedfrom the Arrow-Debreu style real business cycle models. Both classes oftheories are set in dynamic general equilibrium with optimizing agentsand well-speciÞed tastes and technology. Instead of being set in a perfectreal business cycle world, the presence of market imperfectionsand nominal rigidities permit international transfers of wealth in equilibriumand prevent equilibrium welfare from reaching the socially optimallevel of welfare. It therefore makes sense here to examine the263