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Real Business Cycles in a Small Open Economy with Non-Traded Goods

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Author Info

  • Balsam, A.
  • Eckstein, Z.

Abstract

The Israeli economy business cycle properties are different from those of most OECD countries in four main dimensions. Aggregate consumption is twenty percent more volatile than output, the trade balance is much more volatile than output and is procyclical, investment is almost five times more volatile than output, and the auto-correlation in output is low. The puzzle that these observations imply is explained in this paper by the result that with three parameters of a CES utility function and the share of non-traded goods in government expenditures, one can get almost any volatility in consumption, holding constant the production side parameters. Alternative values of the CES utility parameters drastically affects the consumer decision on shifting the traded goods consumption in response to shock in both sectors. The main result is that the model fits all the main business cycle properties of the Israeli economy, described above.

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Bibliographic Info

Paper provided by Tel Aviv in its series Papers with number 2001-3.

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Length: 38 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:fth:teavfo:2001-3

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Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.
Phone: 972-3-640-9255
Fax: 972-3-640-5815
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Web page: http://econ.tau.ac.il/research/foerder.asp
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Keywords: BUSINESS CYCLES ; TRADE ; SIMULATION;

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Cited by:
  1. Kónya, István & Benczúr, Péter, 2005. "Nominális növekedés egy kis, nyitott gazdaságban
    [Nominal growth in a small open economy]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 556-575.
  2. Akito Matsumoto, 2007. "The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice," IMF Working Papers 07/163, International Monetary Fund.
  3. Péter Benczúr & István Kónya, 2007. "Convergence, capital accumulation and the nominal exchange rate," MNB Working Papers 2007/2, Magyar Nemzeti Bank (the central bank of Hungary).

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