Closing Small Open Economy Models

Stephanie Schmitt-Grohe and Martín Uribe ()

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: The small open economy model with incomplete asset markets features a steady state that depends on initial conditions. In addition, equilibrium dynamics posses a random walk component. A number of modifications to the standard model have been proposed to induce stationarity. This paper presents a quantitative comparison of these alternative approaches. Five different specifications are considered: (1) A model with an endogenous discount factor (Uzawa-type preferences); (2) A model with a debt-elastic interest-rate premium; (3) A model with convex portfolio adjustment costs; (4) A model with complete asset markets; (5) A model without stationarity-inducing features. The main finding of the paper is that all models deliver virtually identical dynamics at business-cycle frequencies, as measured by unconditional second moments and impulse response functions. The only noticeable difference among the alternative specifications is that the complete-asset-market model induces smoother consumption dynamics.

Keywords: Complete and Incomplete Asset Markets; Small Open Economy; Stationarity (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2001-11-08
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Citations: View citations in EconPapers (44)

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Related works:
Journal Article: Closing small open economy models (2003)
Working Paper: Closing Small Open Economy Models (2002)
Working Paper: Closing Small Open Economy Models (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:200115

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