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Macroeconomic Model of Transition Economy: A Stochastic Calculus Approach

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  • Sarajevs, Vadims

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    (BOFIT)

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    Abstract

    An integrated stochastic macroeconomic model of transition economy at the early stage of reforms with optimising representative risk averse agents is constructed. The equilibrium growth rate of the economy, real asset returns, domestic money demand, and expected inflation rate are determined as functions of the exogenous risks in the economy. The main issue addressed are: domestic money demand, currency substitution ratio, expected rate of inflation, real asset returns, the equilibrium growth rate of the economy as well as government ability to control these variables. Analysis of the model finds that the equilibrium growth rate of the economy is not independent on the monetary and fiscal policies but can be affected by the government through its ability to fix the real cost of capital for the firm, expenditure and monetary policy parameters.

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    File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp0799.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 7/1999.

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    Length: 47 pages
    Date of creation: 14 Sep 1999
    Date of revision:
    Handle: RePEc:hhs:bofitp:1999_007

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    1. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
    2. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
    3. Rebelo, S. & Vegh, C.A., 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," RCER Working Papers 405, University of Rochester - Center for Economic Research (RCER).
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    5. Dixon, Huw David, 1996. "A Macro-Theoretic Model of the Chinese Economy," CEPR Discussion Papers 1370, C.E.P.R. Discussion Papers.
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    7. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    8. Grinols, Earl L. & Turnovsky, Stephen J., 1994. "Exchange rate determination and asset prices in a stochastic small open economy," Journal of International Economics, Elsevier, vol. 36(1-2), pages 75-97, February.
    9. Bhandari, Jagdeep S. & Ul Haque, Nadeem & Turnovsky, Stephen J., 1989. "Growth, debt, and sovereign risk in a small, open economy," Policy Research Working Paper Series 260, The World Bank.
    10. Benavie, Arthur & Grinols, Earl & Turnovsky, Stephen J., 1996. "Adjustment costs and investment in a stochastic endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 77-100, August.
    11. Jagdeep S. Bhandari & Nadeem Ul Haque & Stephen J. Turnovsky, 1990. "Growth, External Debt, and Sovereign Risk in a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 388-417, June.
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