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Collateral constraints, external imbalances and heterogeneous agents in a two-country world

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  • Eleni Iliopulos

    (University of Pavia and EPEE, University of Evry)

Abstract

In this article, we focus on current account dynamics in large open economies characterized by debt-constrained heterogeneous agents and endogenous monetary policies. We incorporate three key features that have bulked large in the New Open Macroeconomics literature: i) home bias in trade ii) price rigidities and iii) durable goods (real properties). In order to limit agents’ willingness to consume and to (partially) insure creditors against the risk of default, we incorporate collateral constraints. We show that the impatience of collateral-constrained agents can be at the roots of permanent and sustainable external imbalances. Our model has a unique and dynamically determinate steady state, which is characterized by a positive level of debt. Our framework allows us to analyze the mechanisms at the roots of the (international) transmission of shocks and to focus on the implications of the monetary policy rules.

Suggested Citation

  • Eleni Iliopulos, 2008. "Collateral constraints, external imbalances and heterogeneous agents in a two-country world," Documents de recherche 08-12, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:08-12
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    File URL: http://epee.univ-evry.fr/RePEc/2008/08-12.pdf
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    More about this item

    Keywords

    open economy; durable goods; collateral constraints; sticky prices; simple monetary rules;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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