Closing small open economy models

Arbeitspapier

The small open economy model with incomplete asset markets features a steady state that depends on initial conditions. In addition, equilibrium dynamics posses a random walk component. A number of modifications to the standard model have been proposed to induce stationarity. This paper presents a quantitative comparison of these alternative approaches. Five different specifications are considered: (1) A model with an endogenous discount factor (Uzawa-type preferences); (2) A model with a debt-elastic interest-rate premium; (3) A model with convex portfolio adjustment costs; (4) A model with complete asset markets; (5) A model without stationarity-inducing features. The main finding of the paper is that all models deliver virtually identical dynamics at business-cycle frequencies, as measured by unconditional second moments and impulse response functions. The only noticeable difference among the alternative specifications is that the complete-asset-market model induces smoother consumption dynamics.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2001-15

Classification and Topics

• Classification: Wirtschaft ; Open Economy Macroeconomics
• Subject: Complete and Incomplete Asset Markets ; Small Open Economy ; Stationarity ; Kleines-offenes-Land ; Finanzmarkt ; Unvollkommener Markt ; Anpassungskosten ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schmitt-Grohe, Stephanie ; Uribe, Martín
• Event: Veröffentlichung
• (who): Rutgers University, Department of Economics
• (where): New Brunswick, NJ
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/79190
• Last update: 10.03.2025, 11:41 AM CET