External imbalances and collateral constraints in a two-country world

Eleni Iliopulos

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In this article, we focus on current account dynamics in large open economies characterized by debt-constrained heterogeneous agents and endogenous monetary policies. We incorporate three key features that have bulked large in the New Open Macroeconomics literature: i) home bias in trade, ii) price rigidities, and iii) durable goods (real properties). In order to limit agents' willingness to consume and to (partially) insure creditors against the risk of default, we incorporate collateral constraints. We show that the impatience of collateral-constrained agents can be at the roots of permanent external imbalances. Indeed our model has a unique and dynamically determinate steady state, which is characterized by a positive level of debt. Our framework allows us to analyze the linkage between exchange rates, real assets and international capital flows. We focus on this mechanism so as to track the (international) transmission of shocks and the implications for the monetary policy. We show how developments hitting the house market can affect current account and exchange rate dynamics

Keywords: Open economy; durable goods; collateral constraints; sticky prices; simple monetary rules (search for similar items in EconPapers)
JEL-codes: E52 F32 F37 F41 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2009-10
New Economics Papers: this item is included in nep-cba and nep-dge
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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ftp://mse.univ-paris1.fr/pub/mse/CES2009/09065.pdf (application/pdf)

Related works:
Working Paper: External imbalances and collateral constraints in a two-country world (2009)
Working Paper: External imbalances and collateral constraints in a two-country world (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:09065

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