THE SHOCK REACTION IN A SMALL OPEN ECONOMY WITH PRICE FRICTION

Abstract

This work presents the analysis of a small open economy DSGE model with price friction to
investigate the effect of various shocks on the economy. The model is estimated by the
Bayesian technique with the quarterly detrended data of Thailand, 2001: Q1-2019: Q2. By
separating the analysis into two cases, the results showed that the flexible price model is more sensitive to shocks and able to adjust to equilibrium faster than the price friction model. Therefore this work suggests that to formulate the model to capture the dynamic within an economy one need to recognize the nature of the economy under analysis and correctly formulate the model that reflects the level of price friction.