The household preference structure and pricing-to-market in the New Open Economy Macroeconomics models

In this paper, I study three New Open Economy Macroeconomics models to investigate how the assumptions made about the household preference structure and the degree of pricing-to-market affect the model solutions. The first model is a generalized two-country, two-sector model which produces the theoretical ambiguity concerning the state of the economy. The second model simplifies the preference structure and generates the tractable model solutions. The third pricing-to-market model finds that the terms of trade movements depend crucially on the degree of pricing-to-market. The empirical investigation is thus of much interest since theory fails to give a clear prediction.