Non-Stationarity and Instability in Small Open-Economy Models Even When They Are 'Closed'

20 Pages Posted: 9 Dec 2012

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2007

Abstract

It is well-known that the small open-economy model with incomplete asset markets leads to a non-stationary (linearized) solution. This article shows that stationarity-inducing modifications, such as debt-elastic interest rates, can imply non-existence of the rational expectations equilibrium. Alternative specifications are then suggested and discussed that avoid this problem.

Suggested Citation

Lubik, Thomas, Non-Stationarity and Instability in Small Open-Economy Models Even When They Are 'Closed' (2007). Available at SSRN: https://ssrn.com/abstract=2186641

Thomas Lubik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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