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Equilibrium stability in open economy models

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  • Bodenstein, Martin

Abstract

This paper derives analytical results for the relationship between the slope of the excess demand function and the dynamic properties around a deterministic steady state in a two country model. In models that admit multiple steady states, the sign of the slope of the excess demand function is positive for some steady states and negative for others. To obtain stationarity of the net foreign asset position under incomplete financial markets I introduce the stationary inducing devices analyzed in Schmitt-Grohé and Uribe (2003) and Ghironi (2006). For portfolio costs, a debt-elastic interest rate, or an overlapping generations framework the equilibrium dynamics around a steady state are unbounded if the excess demand function for the foreign traded good is increasing in the good’s own price. Otherwise the dynamics are bounded and locally unique. By contrast, with Uzawa-type preferences, the equilibrium dynamics around a steady state are shown to be bounded and locally unique irrespective of the sign of the slope of the excess demand function.

Suggested Citation

  • Bodenstein, Martin, 2013. "Equilibrium stability in open economy models," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 1-13.
  • Handle: RePEc:eee:jmacro:v:35:y:2013:i:c:p:1-13
    DOI: 10.1016/j.jmacro.2012.09.002
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Javier Garcia-Cicco & Roberto Pancrazi & Martin Uribe, 2010. "Real Business Cycles in Emerging Countries?," American Economic Review, American Economic Association, vol. 100(5), pages 2510-2531, December.
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    7. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
    8. Timothy J. Kehoe, 1985. "Multiplicity of Equilibria and Comparative Statics," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 119-147.
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    10. Boileau, Martin & Normandin, Michel, 2008. "Closing international real business cycle models with restricted financial markets," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 733-756, September.
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    More about this item

    Keywords

    Equilibrium multiplicity; Incomplete markets; Open economy;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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