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The Natural Rate of Interest in a Small Open Economy

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  • Fernando de Holanda Barbosa

Abstract

The goal of this paper is two-fold. Firstly, this paper shows that the natural rate of interest in a small open economy, with access to the world capital markets, is equal to the international real rate of interest. We show this property by using the infinitely-lived overlapping generations model and we use this model to analyze both fixed and flexible exchange rate regimes. Secondly, this paper also shows that the empirical implausibility hypothesis embedded in the infinitely-lived representative-agent model, with complete asset markets, turns this framework not appropriate for a small open economy.

Suggested Citation

  • Fernando de Holanda Barbosa, 2011. "The Natural Rate of Interest in a Small Open Economy," Working Papers 05-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    • Handle: RePEc:fea:wpaper:05-2011
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    References listed on IDEAS

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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