Closing Small Open Economy Models

Stephanie Schmitt-Grohe and Martín Uribe ()

No 9270, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The small open economy model with incomplete asset markets features a steady state that depends on initial conditions and equilibrium dynamics that possess a random walk component. A number of modifications to the standard model have been proposed to induce stationarity. This paper presents a quantitative comparison of these alternative approaches. Five different specifications are considered: (1) A model with an endogenous discount factor (Uzawa-type preferences); (2) A model with a debt-elastic interest-rate premium; (3) A model with convex portfolio adjustment costs; (4) A model with complete asset markets; and (5) A model without stationarity-inducing features. The main finding of the paper is that all models deliver virtually identical dynamics at business-cycle frequencies, as measured by unconditional second moments and impulse response functions. The only noticeable difference among the alternative specifications is that the complete-asset-market model induces smoother consumption dynamics.

JEL-codes: F41 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-dge
Note: EFG
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Citations: View citations in EconPapers (89)

Published as Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.

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Journal Article: Closing small open economy models (2003)
Working Paper: Closing Small Open Economy Models (2002)
Working Paper: Closing Small Open Economy Models (2001)
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