Modelling Small Open Developing Economies in a Financialized World: A Stock-Flow Consistent Prototype Growth Model
Antoine Godin () and
Sakir Yilmaz ()
Working Paper from Agence française de développement
This paper builds a stock-ﬂow consistent growth model in continuous time in order to analyze the eﬀects of policy rates in ﬁnancial centres on a small open developing economy with an open capital account and a ﬂexible exchange rate. Using a balance-sheet approach and explicitly modelling real-ﬁnancial spheres interactions and propagation mechanisms, we show that a fall in global policy rates triggers appreciation-induced boom-bust episodes in the small open economy, driven by portfolio ﬂows and cross-border lending. During the boom, public balances improve, unemployment and inﬂation fall and current account deﬁcit widens. Our results show that the boom is larger if foreign exchange market adjustment is sluggish, expectations adjust more rapidly, banking sector is monopolistic or risk perception is less sensitive to fundamentals. In the absence of productivity growth diﬀerentials between the developing economy and the rest of the world, the balance-of payments constrained growth rate is a strong attractor and the economy gravitates towards this growth rate as ﬁnancial variables and exchange rates adjust to their new levels.
JEL-codes: Q (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Published in Research Papers
Downloads: (external link)
https://www.afd.fr/sites/afd/files/2020-02-06-25-4 ... 20Growth%20Model.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:avg:wpaper:en10824
Access Statistics for this paper
More papers in Working Paper from Agence française de développement Contact information at EDIRC.
Bibliographic data for series maintained by AFD ().