Steady State Analysis of an Open Economy General Equilibrium Model for Brazil

Mirta Bugarin, Roberto Ellery, Victor Gomes and Marcelo Muinhos

No 92, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The aim of the present research is to build an open economy recursive general equilibrium model for the Brazilian economy in order to numerically assess the corresponding steady state equilibrium. This characterization allows us to numerically compute the endogenously determined steady state key relationship, namely the primary surplus aggregate output as well as the debt-product ratio among other variables, as functions of the monetary and fiscal policy parameters chosen by the government of the model economy. The adopted model introduces a transaction technology, which allows us to obtain a monetary equilibrium at steady state. This economy differs from the one used by Ljungqvist and Sargent (2000) for it considers an open economy with accumulation and production. The main result has shown that under the adopted parameterization the steady state of the model economy can numerically characterized by a debt output ratio of 0.3387. The numerical simulations show alternative steady states attainable by the government of the model economy. In order to finance higher expenses the government is bounded to trade-off higher interest rate (low inflation or high return on real money balances) with low operational surpluses due to the higher debt output ratio at the long run equilibrium.

Date: 2005-04
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