The Dynamics of a Two-Country Minimodel Under Rational Expectations

Abstract

The stability and steady-state properties of a small model of the United States and the Rest of the World (MINIMOD) are examined. It is shown that the marginal propensity to consume out of wealth is a crucial parameter, and estimates are chosen to ensure stability of the model. The need to stabilize government debt as a ratio to GNP is discussed, and a simulation rule is included that adjusts tax rates accordingly. Finally, the dynamics of the model in response to monetary and fiscal shocks are related to the following structural features: the J-curve, lags in money demand, and price stickiness.