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.
Key Findings
- The effects of foreign and global shocks on a domestic economy are found to be larger if the global input-output network is highly asymmetric and if the shocked foreign sector’s exports constitute a relatively large share of the exports to that domestic economy.
- While the relative degree of price stickiness in the shocked sector as well as aggregate price rigidity affect the responses to domestic and foreign shocks, heterogeneity in price stickiness appears less important. This result holds for both symmetric and asymmetric production linkages.
Implications
This paper’s open-economy model accounts for international supply linkages and thereby helps to foster a better understanding of the economic effects of shocks to particular geographical and/or sectoral nodes of the global production network.
Abstract
We study the aggregate effects of sectoral productivity shocks in a multisectoral New Keynesian open-economy model that allows for asymmetric input-output linkages, both within and between countries, as well as for heterogeneity in sectoral Calvo-type price stickiness. Asymmetries in the international production network play a key role in the model’s ability to produce large domestic effects of foreign sectoral supply shocks and large differential effects of domestic shocks and global shocks. Larger trade openness and substitutability between domestic inputs and foreign inputs can also significantly amplify the effects of foreign and global sectoral shocks on domestic aggregates. In comparison, sectoral heterogeneity in price stickiness does not materially amplify the domestic responses to productivity shocks that originate abroad.