Dynamics of Open Economy Business Cycle Models: Understanding the Role of the Discount Factor

29 Pages Posted: 19 May 2000  

Sunghyun Henry Kim

Sungkyunkwan University - Department of Economics

M. Ayhan Kose

Development Prospects Group at the World Bank

Abstract

This paper examines the dynamic implications of different preference formulations in open economy business cycle models with incomplete asset markets. In particular, we study two preference formulations: a time separable preference formulation with a fixed discount factor, and a time non-separable preference structure with an endogenous discount factor. We analyze the moment implications of two versions of an otherwise identical open economy model -- one with a fixed discount factor and the other with an endogenous discount factor -- and study impulse responses to productivity and world real interest rate shocks. Our results suggest that business cycle implications of the two models are quite similar under conventional parameter values. We also find the approximation errors associated with the solutions of these two models are of the same magnitude.

JEL Classification: E3, F4

Suggested Citation

Kim, Sunghyun Henry and Kose, M. Ayhan, Dynamics of Open Economy Business Cycle Models: Understanding the Role of the Discount Factor. Available at SSRN: https://ssrn.com/abstract=223598 or http://dx.doi.org/10.2139/ssrn.223598

Sunghyun Henry Kim

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul
Korea

M. Ayhan Kose (Contact Author)

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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