Size, Openness, and Macroeconomic Interdependence

23 Pages Posted: 6 Feb 2017

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

Roland Straub

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

One common, simplifying assumption in open economy macroliterature is that the rest of the world can be thought of as a representative economy. This article formally investigates conditions under which this assumption can be justified using a multicountry general equilibrium model as a laboratory. We derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Thereby, we show that the two‐country framework is a valid approximation only for economies that have diversified trade linkages and only when there is no globally dominant economy among the foreign economies.

Suggested Citation

Chudik, Alexander and Straub, Roland, Size, Openness, and Macroeconomic Interdependence (February 2017). International Economic Review, Vol. 58, Issue 1, pp. 33-55, 2017. Available at SSRN: https://ssrn.com/abstract=2911306 or http://dx.doi.org/10.1111/iere.12208

Alexander Chudik (Contact Author)

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

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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