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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.
    3. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    4. Kehoe, Timothy J, 1980. "An Index Theorem for General Equilibrium Models with Production," Econometrica, Econometric Society, vol. 48(5), pages 1211-1232, July.
    5. Dotsey, Michael & King, Robert G., 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 213-242, January.
    6. Devereux, Michael B. & Smith, Gregor W., 2007. "Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2375-2398, November.
    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.
    9. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    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.
    11. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    12. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
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    More about this item

    Keywords

    Equilibrium multiplicity; Incomplete markets; Open economy;

    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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