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Multilateral Comovement in a New Keynesian World : A Little Trade Goes a Long Way, Working Paper 22-10

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Multilateral Comovement in a New Keynesian World : A Little Trade Goes a Long Way, Working Paper 22-10

DATE: November 26, 2022

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We study how international linkages and nominal price rigidities jointly shape the dynamics of inflation and output across multiple large economies. We describe how these features produce a global system of Phillips curves explicitly connected by multilateral trade relationships. In equilibrium, disturbances abroad propagate to domestic variables not only directly, through pairwise trade between countries, but also indirectly through third-country effects arising from the network structure of trade. The combined propagation mechanisms imply that country-specific shocks alone explain almost 90 percent of the observed average pairwise comovement in output growth between countries. These idiosyncratic shocks also explain more than 1/2 the cross-country comovement in inflation, and between output and inflation. We estimate that a European inflationary shock results in significant U.S. inflation accompanied by lower output, and that these responses transpire almost entirely from the network effects of trade. In addition, a tightening of U.S. monetary policy generates a percentage decline in output globally that is comparable to 1/2 the domestic response.

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Sarte, Pierre-Daniel and Schwartzman, Felipe Farah, 1981-. "Multilateral Comovement in a New Keynesian World : A Little Trade Goes a Long Way, Working Paper 22-10," Working Papers (Federal Reserve Bank of Richmond) (November 26, 2022). https://fraser.stlouisfed.org/title/3942/item/627659, accessed on November 28, 2023.

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DIGITAL COPY SOURCE: Federal Reserve Bank of Richmond

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  • doi: https://doi.org/10.21144/wp22-10
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