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Closing Small and "Sufficiently" Large Open Economies with Different Asset Structures

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Abstract

There are two important dimensions that matter when we write down a model economy of a country that is open to international financial markets. The first one is its size, and the second one is its asset market structure. Small open economies are price takers so the analysis happens in partial equilibrium, while countries that are “sufficiently" large can affect international prices and the analysis happens in general equilibrium. The second important dimension is the asset market structure. If markets are complete there is full risk sharing, while if markets are incomplete there is not. In this paper I explore how these two dimensions—size and market structure—affect the conditions for the existence and the uniqueness of the equilibrium in economic models, and discuss how to achieve those conditions when they are not present. I finish by discussing how these implications change when a tax on the return to net foreign assets is introduced, generating endogenous incomplete markets.

Suggested Citation

  • Paulina Restrepo-Echavarria, 2024. "Closing Small and "Sufficiently" Large Open Economies with Different Asset Structures," Review, Federal Reserve Bank of St. Louis, vol. 106(13), pages 1-8, December.
    • Handle: RePEc:fip:fedlrv:99417
    DOI: 10.20955/r.2024.13
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    References listed on IDEAS

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    More about this item

    Keywords

    open economies; markets;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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