SIZE, OPENNESS, AND MACROECONOMIC INTERDEPENDENCE

Alexander Chudik and Roland Straub

International Economic Review, 2017, vol. 58, issue 1, 33-55

Abstract: One common, simplifying assumption in open economy macroliterature is that the rest of the world can be thought of as a representative economy. This article formally investigates conditions under which this assumption can be justified using a multicountry general equilibrium model as a laboratory. We derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Thereby, we show that the two‐country framework is a valid approximation only for economies that have diversified trade linkages and only when there is no globally dominant economy among the foreign economies.

Date: 2017
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https://doi.org/10.1111/iere.12208

Related works:
Working Paper: Size, openness, and macroeconomic interdependence (2011)
Working Paper: Size, openness, and macroeconomic interdependence (2010)
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