Appendix A: Model Equations
Appendix B: Data Description
Acosta, P., E. Lartey, and F. Mandelman, 2007, “Remittances and the Dutch Disease,” Federal Reserve Bank of Atlanta Working Paper 2007-08.
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See Christiano et al (2005), Clardia et al. (1999, 2001) and references therein for the theoretical underpinnings, and Bucncic et al (2007), Liu (2006), Osvald and Musil (2006) for applications of such New Keynesians models to other small open economies such as Australia, New Zealand, and the Czech Republic.
Tibor Hledik and Jan Vlcek of the Czech National Bank provided considerable support for building and developing the QPM model for the Armenian economy.
The data and analysis in the paper covers the period 2001 - 2007and predates the recent global economic crises.
Monetary policy followed strict targets on the net domestic assets of the CBA and minimal accumulation of bank credit to the government. For a detailed discussion of the changes in the monetary policy framework since the early years of transition, see Dabla-Norris and others (2007), and Dabla-Norris and Floerkemeier (2006).
The CBA was given legal and operational independence to pursue the primary objective of achieving and maintaining price stability, and formal mechanisms for accountability to the inflation target strengthened.
The literature on remittances highlights different motivation for remitters, ranging from an altruistic one to that driven by self-interest, including exploitation of investment opportunities (Acosta et al, 2007). In the case of the former, remittances can be viewed as providing an additional source of income for domestic households. In the latter case, domestic households can be viewed as merely intermediaries that channel funds from foreign residents who use their savings to take advantage of local investment opportunities, thereby having no direct impact on the domestic household’s budge constraint (Lucas and stark, 1985).
Strong evidence of the importance of distribution services for the retail price of consumption goods has been found for other countries as well (Burstein et. al, 2003). Goldberg and Verhoven (2001) based on data for automobile prices in five European countries estimate that local costs account for up to 35 percent of the price of a car due to distribution services provided by local dealers.
Note that if LOP holds (i.e. if ψt = 1), then the import price index is simply the domestic currency price of the foreign price index.
This equation is obtained by combining the consumption Euler equations for both the domestic and foreign economy (excluding the preference shock) with the risk sharing condition (25) and equation (19) which relates domestic inflation to CPI inflation.
The detailed derivation of the price setting rule is presented in Galí and Monacelli (2004) and Walsh (2003).
This assumption differs from Erceg and Levin (1995) and Burstein et. al (2000) who assume that bringing one unit of traded goods to consumers requires some units of nontraded goods. Our model does not make a distinction between tradable and nontradable goods. Instead, we assume that bringing one unit of the imported good to consumers requires labor input.
In the mentioned papers, the LOP gap and real marginal cost of importer firms are identical.
Our specification of the distribution sector is in the spirit of a remark made by Tirole (1995, page 175) that “production and retailing are complements, and consumers often consume them in fixed proportions”
The dynamic simulation was conducted by the Iris-toolbox which was kindly provided by Tibor Hledik and Jan Vlcek of the Czech National Bank.
The observed characteristics are constructed using a bootstrap technique based on an estimated reduced-form VAR model on detrended and seasonally adjusted data. We resample 5000 times from the estimated VAR using the wild bootstrap technique, re-estimate the VAR parameters and re-construct the desired characteristics (see Benes and others (2007) for a more detailed description).