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Trends and cycles in small open economies: Making the case for a general equilibrium approach

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  • Kan Chen
  • Mario Crucini

Abstract

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

Suggested Citation

  • Kan Chen & Mario Crucini, 2016. "Trends and cycles in small open economies: Making the case for a general equilibrium approach," CAMA Working Papers 2016-50, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2016-50
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2016-08/50_2016_chen_crucini.pdf
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    Cited by:

    1. Li, Wei & Luo, Yulei & Nie, Jun, 2017. "Elastic attention, risk sharing, and international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 1-20.
    2. repec:eee:eecrev:v:101:y:2018:i:c:p:157-180 is not listed on IDEAS
    3. Joel M. David & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    4. repec:eee:inecon:v:112:y:2018:i:c:p:123-133 is not listed on IDEAS

    More about this item

    JEL classification:

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

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