External Debt and Taylor Rules in a Small Open Economy

Shigeto Kitano and Kenya Takaku
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Kenya Takaku: Graduate School of Economics, Nagoya University

No DP2013-36, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We develop a dynamic stochastic general equilibrium model of a small open economy in which both price rigidity and financial friction exist. We compare two cases featuring different interest rate rules. Both cases use the standard Taylor-type interest rate rules, but the second case also considers external debt levels. We find that when friction in foreign borrowing is large, adding an external debt level to Taylor rules improves welfare. The welfare curve, however, exhibits a hump shape since excessive reactions to changes in external debt reduce welfare.

Keywords: External debt; Taylor rules; Small open economy; DSGE; Welfare; Emerging market economies (search for similar items in EconPapers)
JEL-codes: E5 F4 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-11, Revised 2016-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-36.pdf Revised version, 2016 (application/pdf)

Related works:
Journal Article: External Debt and Taylor Rules in a Small Open Economy (2016)
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