Putting the `New Open Economy Macroeconomics to a test

This paper explores one way to extend the New Open Economy Macroeconomics in an empirical direction. Adapting maximum likelihood procedures, it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities. Results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer. Price stickiness seems to be an important element, as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer. The benchmark model does a better job explaining some variables than others; in particular, it does a poor job explaining exchange rate movements.