The Natural Rate of Interest in a Small Open Economy

Fernando Barbosa

No 05-2011, Working Papers from Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto

Abstract: The goal of this paper is two-fold. Firstly, this paper shows that the natural rate of interest in a small open economy, with access to the world capital markets, is equal to the international real rate of interest. We show this property by using the infinitely-lived overlapping generations model and we use this model to analyze both fixed and flexible exchange rate regimes. Secondly, this paper also shows that the empirical implausibility hypothesis embedded in the infinitely-lived representative-agent model, with complete asset markets, turns this framework not appropriate for a small open economy.

Keywords: Small open economy; Natural rate of interest; Complete and incomplete asset markets (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
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Related works:
Working Paper: THE NATURAL RATE OF INTEREST IN A SMALLOPEN ECONOMY (2014)
Working Paper: The natural rate of interest in a small open economy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:fea:wpaper:05-2011

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