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The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence

Povoledo, Laura (2009): The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence.

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Abstract

This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: both in the model and in the data the standard deviations of tradeable inflation, output and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. A key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks.

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