A dynamic small open economy model with involuntary unemployment

Zuzana Janko

Canadian Journal of Economics, 2011, vol. 44, issue 4, pages 1350-1368

Abstract: It is well known that real business cycle small open economy (SOE) models rely on Greenwood, Hercowitz, and Huffman (1988) preferences to match the countercyclical trade balance observed in open economies, as well as other second moments, while standard preferences à la King, Plosser, and Rebelo (1988) are commonly labelled `ineffective,' owing to their inability to yield the countercyclical trade balance. In this paper, I show that an SOE model with standard preferences and `involuntary' unemployment with efficient risk sharing can obtain a countercyclical trade balance and match main empirical regularities in small open economies.

JEL-codes: F41 E32 (search for similar items in EconPapers)
Date: 2011
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