Abstract

(under revision, please do not quote without permission) This paper investigates the business cycle fluctuations of the trade-able and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy ” model having prices sticky in the pro-ducer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are con-sistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to mon-etary shocks. Parameter estimates are obtained by Generalised Method of Moments. JEL classification: F41; E32