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Macroeconomic interdependence between a stagnant and a fully employed country

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  • Yoshiyasu Ono

Abstract

This paper presents a two-country two-commodity dynamic model where one country achieves full employment and the other suffers from secular stagnation of aggregate demand. Own and spill-over effects of changes in preference, productivity and policy parameters are examined. Parameter changes that improve the stagnant country’s current account, such as a reduction in government purchases, a decrease in foreign aid and an improvement in productivity, raise the relative price of the home commodity. Consequently, home employment shrinks, deflation worsens and consumption decreases. The terms of trade for the full-employment country deteriorate. Thus, income and consumption decrease in both countries.

Suggested Citation

  • Yoshiyasu Ono, 2014. "Macroeconomic interdependence between a stagnant and a fully employed country," ISER Discussion Paper 0893rr, Institute of Social and Economic Research, Osaka University, revised Feb 2017.
  • Handle: RePEc:dpr:wpaper:0893rr
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    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2014/DP0893RR.pdf
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