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Knife-Edge Conditions And The Macrodynamics Of Small Open Economies

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  • Turnovsky, Stephen J.

Abstract

Macrodynamic models of small open economies are inevitably characterized by knife-edge conditions, meaning that certain parameters are constrained for a viable equilibrium to exist. This paper examines the macrodynamic structure of such an economy and considers the role played by various standard knife-edge conditions. The dynamic model presented is sufficiently general so as to provide a unifying framework within which alternative models can be embedded. We identify three important models as special cases of this generic structure: (i) The traditional stationary Ramsey model, (ii) the endogenous growth model, and (iii) the nonscale growth model. We consider three margins along which knife-edge conditions are imposed. These include (i) preference parameters, (ii) production and employment characteristics, and (iii) openness of international financial markets. These restrictions are shown to play key roles in determining the equilibrium dynamics, and how the economy responds to various shocks. The existence of trade-offs between these knife-edge conditions is discussed.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 6 (2002)
Issue (Month): 02 (April)
Pages: 307-335

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Handle: RePEc:cup:macdyn:v:6:y:2002:i:02:p:307-335_03

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Cited by:
  1. Wilman Gómez & Carlos Esteban Posada, . "Un "Choque" del Activo Externo Neto y el Ciclo Económico Colombiano," Borradores de Economia 285, Banco de la Republica de Colombia.
  2. Yu-chin Chen & Stephen J. Turnovsky, 2008. "Growth and Inequality in a Small Open Economy," Working Papers UWEC-2009-05-FC, University of Washington, Department of Economics, revised Nov 2009.
  3. Mahbub Morshed, A.K.M. & Turnovsky, Stephen J., 2011. "Real exchange rate dynamics: The role of elastic labor supply," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1303-1322.
  4. William Scarth, 2007. "Is Foreign-Owned Capital a Bad Thing to Tax?," Quantitative Studies in Economics and Population Research Reports 422, McMaster University.
  5. Chang, Juin-jen & Huang, Chun-chieh & Lai, Ching-chong, 2007. "Working hours reduction and wage contracting style in a dynamic model with labor adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 971-993, March.
  6. Pedro de Mendonça, 2013. "Nonlinear Phenomena in a Growing Economy with Convex Adjustment Costs," EERI Research Paper Series EERI RP 2013/05, Economics and Econometrics Research Institute (EERI), Brussels.
  7. William Scarth, 2007. "Is Foreign-Owned Capital a Bad Thing to Tax?," Social and Economic Dimensions of an Aging Population Research Papers 214, McMaster University.
  8. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
  9. Pedro, de Mendonça, 2009. "Growth, Fiscal Policy and the Informal Sector in a Small Open Economy," MPRA Paper 13493, University Library of Munich, Germany.
  10. Daria Onori, 2013. "Optimal Growth under Flow-Based Collaterals," Working Papers halshs-00824672, HAL.
  11. Takumi Naito & Ryoji Ohdoi, 2011. "A two-country model of trade and growth with intersectoral knowledge spillovers," Journal of Economics, Springer, vol. 103(1), pages 39-58, May.
  12. Chung, Keunsuk & Turnovsky, Stephen J., 2010. "Foreign debt supply in an imperfect international capital market: Theory and evidence," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 201-223, March.

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