IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v70y2017icp471-493.html
   My bibliography  Save this article

Welfare implications when closing small open economy models

Author

Listed:
  • Özbilgin, Hüseyin Murat

Abstract

This paper establishes that the closing method matters when the small open economy model is used for welfare analysis. The differences stem from the impact of the closing method on debt dynamics. When the ad-hoc parameters are set so that the current account volatility is controlled for across models, the welfare properties of versions with portfolio adjustment costs (PAC) and debt elastic interest rates (DEIR) are significantly different from the version with an endogenous discount factor (EDF). Nevertheless, this outcome is an artifact of an unrealistically dispersed distribution of the net foreign assets under PAC and DEIR, and can disappear under alternative calibrations of the ad-hoc parameters. In this sense, a seemingly innocuous application of PAC and DEIR versions may imply spurious results regarding welfare especially if a highly volatile economy is studied. Under commonly used functional forms, the spuriousness of welfare implications is found to be more radical under DEIR than PAC.

Suggested Citation

  • Özbilgin, Hüseyin Murat, 2017. "Welfare implications when closing small open economy models," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 471-493.
    • Handle: RePEc:eee:jimfin:v:70:y:2017:i:c:p:471-493
    DOI: 10.1016/j.jimonfin.2016.06.006
    as

    Download full text from publisher

    File URL: https://www.sciencedirect.com/science/article/pii/S0261560616300523
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2016.06.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    International macroeconomics; Capital controls; Small open economy; Business cycles;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:70:y:2017:i:c:p:471-493. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.