International Spillover of Economic Fluctuations: A Dynamic Optimization Approach

25 Pages Posted: 1 May 2006

See all articles by Yoshiyasu Ono

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: February 2001

Abstract

After the 1990 Japanese stock market crash the Japanese economy began to stagnate whereas the U.S. economy began to expand, yet the yen tended to appreciate against the dollar. Such a phenomenon is difficult to explain in conventional models. This paper examines its mechanism using a two-country dynamic model that accommodates a liquidity trap and unemployment. If the marginal utility of consumption relative to that of liquidity declines in a country, its current account improves, which appreciates the home currency against the foreign currency. Consequently, home products lose competitiveness, causing home employment to decrease and foreign employment to increase.

Keywords: persistent unemployment, exchange rate, current account

JEL Classification: F41, F42

Suggested Citation

Ono, Yoshiyasu, International Spillover of Economic Fluctuations: A Dynamic Optimization Approach (February 2001). Osaka University Institute of Social and Economic Research Discussion Paper No. 527. Available at SSRN: https://ssrn.com/abstract=899042 or http://dx.doi.org/10.2139/ssrn.899042

Yoshiyasu Ono (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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