Closing Small Open Economy Models
15 Pages Posted: 11 Nov 2001
There are 3 versions of this paper
Closing Small Open Economy Models
Closing Small Open Economy Models
Date Written: November 12, 2001
Abstract
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.
Keywords: Small Open Economy, Stationarity, Complete and Incomplete Asset Markets
JEL Classification: F41, E3
Suggested Citation: Suggested Citation
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