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External imbalances and collateral constraints in a two-country world

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Author Info
Eleni Iliopulos () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPREMAP - Centre pour la recherche économique et ses applications)
Abstract

In this article, we focus on current account dynamics in large open economies characterized by debt-constrained heterogeneous agents and endogenous monetary policies. We incorporate three key features that have bulked large in the New Open Macroeconomics literature : i) home bias in trade, ii) price rigidities, and iii) durable goods (real properties). In order to limit agents' willingness to consume and to (partially) insure creditors against the risk of default, we incorporate collateral constraints. We show that the impatience of collateral-constrained agents can be at the roots of permanent external imbalances. Indeed our model has a unique and dynamically determinate steady state, which is characterized by a positive level of debt. Our framework allows us to analyze the linkage between exchange rates, real assets and international capital flows. We focus on this mechanism so as to track the (international) transmission of shocks and the implications for the monetary policy. We show how developments hitting the house market can affect current account and exchange rate dynamics.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00429600_v1.

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Date of creation: Oct 2009
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Handle: RePEc:hal:cesptp:halshs-00429600_v1

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Related research
Keywords: Open economy ; durable goods ; collateral constraints ; sticky prices ; simple monetary rules;

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