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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 J. 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 J. Crucini, 2014. "Trends and cycles in small open economies: making the case for a general equilibrium approach," Globalization Institute Working Papers 217, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:217
    DOI: 10.24149/gwp217
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    5. Hansen, James & Gross, Isaac, 2018. "Commodity price volatility with endogenous natural resources," European Economic Review, Elsevier, vol. 101(C), pages 157-180.
    6. Joel M. David & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    7. Bertrand Candelon & Alina Carare & Jean-Baptiste Hasse & Jing Lu, 2020. "The post-crises output growth effects in a globalized economy," International Economics, CEPII research center, issue 161, pages 139-158.
    8. Jacek Rothert, 2020. "International Business Cycles In Emerging Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 753-781, May.
    9. Carlos A. Yépez, 2020. "International risk sharing in emerging economies," International Finance, Wiley Blackwell, vol. 23(3), pages 434-459, December.
    10. Sámano Daniel, 2022. "Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods," Working Papers 2022-20, Banco de México.

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    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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