The Aggregate Effects of Sectoral Shocks in an Open Economy
This paper develops an open-economy model in which foreign sectoral shocks are propagated and amplified through the global supply chain and nominal rigidities. The model combines the sectoral input-output linkages and heterogeneity in price rigidity of closed-economy multisectoral models with features of a one-sector open-economy New Keynesian model. In this setup, the authors focus on the effects of domestic, foreign, and global sectoral productivity shocks. Specifically, they look at whether the model can generate large responses to foreign sectoral shocks and thereby separate the effects of domestic shocks from the effects of global shocks.