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

29 Pages Posted: 19 May 2000

See all articles by Sunghyun Henry Kim

Sunghyun Henry Kim

Sungkyunkwan University - Department of Economics

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

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)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

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