International Spillover of Economic Fluctuations:A Dynamic Optimization Approach

Yoshiyasu Ono

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: After the 1990 Japanese stock market crash the Japanese economy began to stagnate whereas the U.S. economy began to expand, yet the yen tended to appreciate against the dollar. Such a phenomenon is difficult to explain in conventional models. This paper examines its mechanism using a two-country dynamic model that accommodates a liquidity trap and unemployment. If the marginal utility of consumption relative to that of liquidity declines in a country, its current account improves, which appreciates the home currency against the foreign currency. Consequently, home products lose competitiveness, causing home employment to decrease and foreign employment to increase.

Date: 2001-01
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:0527

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