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A simple aggregate demand analysis with dynamic optimization in a small open economy

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  • Hashimoto, Ken-ichi
  • Ono, Yoshiyasu

Abstract

We develop a very simple aggregate demand analysis of a small open economy that suffers from secular demand stagnation. It looks like the conventional Keynesian cross analysis but considers dynamically optimizing behavior of households and firms, international capital movement, and the current account adjustment. We find that parameter changes that improve the current account yield an appreciation pressure on the home currency and decrease demand for the home commodity and labor. Consequently, they worsen deflation and decrease consumption and income. This result is quite opposite to that under full employment. For example, an exogenous rise in the price of the home commodity decreases employment, consumption and income. If a country owns greater foreign assets, it suffers from less employment, consumption and income.

Suggested Citation

  • Hashimoto, Ken-ichi & Ono, Yoshiyasu, 2020. "A simple aggregate demand analysis with dynamic optimization in a small open economy," Economic Modelling, Elsevier, vol. 91(C), pages 89-99.
    • Handle: RePEc:eee:ecmode:v:91:y:2020:i:c:p:89-99
    DOI: 10.1016/j.econmod.2020.04.019
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    Cited by:

    1. Ikefuji, Masako & Ono, Yoshiyasu, 2021. "Environmental policies in a stagnant economy," Economic Modelling, Elsevier, vol. 102(C).
    2. Jean-Baptiste Michau, 2021. "Open Economy Secular Stagnation and Financial Integration," Working Papers 2021-19, Center for Research in Economics and Statistics.
    3. Sasaki, Hiroaki, 2020. "Product and Process Innovation, Keynesian Unemployment, and Economic Growth," MPRA Paper 101031, University Library of Munich, Germany.
    4. Murota, Ryu-ichiro, 2022. "The effect of a decline in the world real interest rate on a small open economy experiencing persistent stagnation," Economics Letters, Elsevier, vol. 216(C).

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    More about this item

    Keywords

    Aggregate demand shortage; Unemployment; Small open economy;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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