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Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy

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  • Wang, Gaowang
  • Zou, Heng-fu

Abstract

This paper develops a simple mercantilism model for a small open economy and examines the real effects of macroeconomic policies. In this setting, the saddle-point stability of the model with wealth effects hinges on an interesting "relative smoothness condition" for foreign asset accumulation. And comparative static analysis shows that an increase of monetary growth rate and a central-bank purchase of foreign exchange have positive real effects on the economy. In contrast, an increase of government expenditure always has negative effects on the economy. Moreover, the stronger of the mercantilist sentiments, the more consumption, real money balance holdings and foreign asset accumulation in the long run. These conclusions are very different from those ridiculous ones of Obstfeld's paper (1981).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34519.

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Date of creation: 30 Oct 2011
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Handle: RePEc:pra:mprapa:34519

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Keywords: Mercantilism; Foreign Asset Accumulation; Relative Smoothness Condition;

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  1. Heng-Fu Zou, 1997. "Dynamic analysis in the Viner model of mercantilism," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(4), pages 637-651, August.
  2. Shouyong Shi, 2000. "Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 63, China Economics and Management Academy, Central University of Finance and Economics, revised Oct 2001.
  3. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
  4. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  5. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(2), pages 251-70, May.
  6. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, Elsevier, vol. 26(1), pages 45-75, August.
  7. Robert Barro, 2003. "Optimal Management of Indexed and Nominal Debt," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 496, China Economics and Management Academy, Central University of Finance and Economics.
  8. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
  9. Smith, Adam, 1977. "An Inquiry into the Nature and Causes of the Wealth of Nations," University of Chicago Press Economics Books, University of Chicago Press, number 9780226763743 edited by Cannan, Edwin, February.
  10. S. Rao Aiyagari & Ellen R. McGrattan, 2003. "The Optimum Quantity of Debt: Technical Appendix," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 193-217, May.
  11. Jianjun Miao, 2004. "A Note on Consumption and Savings under Knightian Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 299-311, November.
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