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Closing open economy models

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Author Info
Martin Bodenstein

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Abstract

Several methods have been proposed to obtain stationarity in open economy models. I find substantial qualitative and quantitative differences between these methods in a two-country framework, in contrast to the results of Schmitt-Grohé and Uribe (2003). In models with a debt elastic interest rate premium or a convex portfolio cost, both the steady state and the equilibrium dynamics are unique if the elasticity of substitution between the domestic and the foreign traded good is high. However, there are three steady states if the elasticity of substitution is sufficiently low. With endogenous discounting, there is always a unique and stable steady state irrespective of the magnitude of the elasticity of substitution. Similar to the model with convex portfolio costs or a debt elastic interest rate premium, though, there can be multiple convergence paths for low values of the elasticity.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 867.

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Date of creation: 2006
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Keywords: International finance ; Equilibrium (Economics) ; Econometric models;

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Zeno Enders & Gernot J. Mueller, 2006. "S-Curve Redux: On the International Transmission of Technology Shocks," Economics Working Papers ECO2006/36, European University Institute. [Downloadable!]
  2. Ippei Fujiwara & nd Naohisa Hirakata, 2007. "Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects"," IMES Discussion Paper Series 07-E-07, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  3. Andrea Ferrero & Mark Gertler & Lars E.O. Svensson, 2008. "Current Account Dynamics and Monetary Policy," NBER Working Papers 13906, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Christoph Thoenissen, 2008. " Exchange rate dynamics, asset market structure and the role of the trade elasticity," CDMA Working Paper Series 0803, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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