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The role of net foreign assets in a New Keynesian small open economy model

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  • Ghironi, Fabio

Abstract

This paper develops a small open economy, sticky-price model that determines a unique, stable long-run asset position for households as function of their incentive to anticipate or postpone consumption and labor effort across periods. This is accomplished by adopting an overlapping-generations structure in which new households with no assets enter the economy in each period. The same characteristics of household behavior that determine long-run assets are also important determinants of the model's responses to shocks. Stabilizing producer prices results in a milder recession following a drop in world demand than stabilizing consumer prices because it prevents the markup in the pricing of goods from increasing. In addition, given an initial foreign debt, allowing consumer prices to rise causes a decrease in the ex post real interest rate on impact, lowering the interest burden of the initial debt. The differences across policy rules generated by the initial asset position are robust to changes in the latter as long as these are brought about by changes in parameter values that do not alter the fundamental characteristics of household (and firm) behavior that are also the key determinants of long-run assets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 6 (June)
Pages: 1780-1811

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:6:p:1780-1811

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Cited by:
  1. repec:hal:journl:halshs-00497486 is not listed on IDEAS
  2. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  3. Ester Faia & Eleni Iliopulos, 2010. "Financial globalization, financial frictions and optimal monetary policy," Globalization and Monetary Policy Institute Working Paper 52, Federal Reserve Bank of Dallas.
  4. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
  5. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics.
  6. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.
  7. Ippei Fujiwara & Yuki Teranishi, 2007. "A Dynamic New Keynesian Life-Cycle Model: Societal Ageing, Demographics and Monetary Policy," IMES Discussion Paper Series 07-E-04, Institute for Monetary and Economic Studies, Bank of Japan.

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