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A Simple Open Economy Model: A Non-Linear Dynamic Approach

Author

Listed:
  • Jan Kodera
  • Van Quang TRAN

Abstract

The objective of this article is to derive a simple dynamic macroeconomic model of an open economy to show how an economy as a dynamic system can work. The proposed model is resulted from the traditional Mundell-Fleming model. Unlike the Mundell-Fleming model, we introduce a continuous dynamic and non-linearity. Non-linearity in our model is represented by a non-linear investment function. The non-linear investment function is introduced as the propensity to invest function, which is assumed to be captured by the logistic function of production. After that, the stability of the model is analysed using Hurwitz stability theorem. The behaviour of our non-linear macroeconomic model of open economy is demonstrated on two numerical examples in which two different sets of parameters are selected to examine the dynamic of the system with emphasis on the impact of export multiplier. The presented examples show that the model is able to generate very complex dynamic.

Suggested Citation

  • Jan Kodera & Van Quang TRAN, 2017. "A Simple Open Economy Model: A Non-Linear Dynamic Approach," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2017(1), pages 19-34.
    • Handle: RePEc:prg:jnlefa:v:2017:y:2017:i:1:id:175:p:19-34
    DOI: 10.18267/j.efaj.175
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    References listed on IDEAS

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    1. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
    2. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, December.
    3. repec:czx:journl:v:14:y:2007:i:24:id:151 is not listed on IDEAS
    4. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
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    More about this item

    Keywords

    Uncovered interest rate parity; Money market dynamics; Limit cycle; Exchange rate dynamics; Dynamic model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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