INTERNATIONAL ASYMMETRY IN BUSINESS ACTIVITY AND APPRECIATION OF A STAGNANT COUNTRY'S CURRENCY*

Yoshiyasu Ono

The Japanese Economic Review, 2006, vol. 57, issue 1, 101-120

Abstract: This paper develops a two‐country, two‐commodity continuous‐time dynamic optimization model that accommodates a liquidity trap and persistent unemployment. It investigates a theoretical possibility of international asymmetry in business activity and a stagnant country's currency appreciation, which has been the common experience of Japan and the USA after Japan's total capital liberalization. It is found that if the marginal utility of consumption relative to that of liquidity exogenously declines in a country, its current account improves and the home currency appreciates. Consequently, home products lose competitiveness, causing home employment to decrease and foreign employment to increase.

Date: 2006
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