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Real Business Cycles in a Small Open Economy with Non-Traded Goods

Author

Listed:
  • Balsam, A.
  • Eckstein, Z.

Abstract

The Israeli economy business cycle properties are different from those of most OECD countries in four main dimensions. Aggregate consumption is twenty percent more volatile than output, the trade balance is much more volatile than output and is procyclical, investment is almost five times more volatile than output, and the auto-correlation in output is low. The puzzle that these observations imply is explained in this paper by the result that with three parameters of a CES utility function and the share of non-traded goods in government expenditures, one can get almost any volatility in consumption, holding constant the production side parameters. Alternative values of the CES utility parameters drastically affects the consumer decision on shifting the traded goods consumption in response to shock in both sectors. The main result is that the model fits all the main business cycle properties of the Israeli economy, described above.

Suggested Citation

  • Balsam, A. & Eckstein, Z., 2001. "Real Business Cycles in a Small Open Economy with Non-Traded Goods," Papers 2001-3, Tel Aviv.
  • Handle: RePEc:fth:teavfo:2001-3
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    Citations

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    Cited by:

    1. Akito Matsumoto, 2007. "The Role of Nonseparable Utility and Nontradeables in International Business Cycles and Portfolio Choice," IMF Working Papers 07/163, International Monetary Fund.
    2. Benczur, Peter & Konya, Istvan, 2013. "Convergence, capital accumulation and the nominal exchange rate," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 260-281.
    3. Kónya, István & Benczúr, Péter, 2005. "Nominális növekedés egy kis, nyitott gazdaságban
      [Nominal growth in a small open economy]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 556-575.
    4. Jesús A. Bejarano & Luisa F. Charry, 2014. "Financial Frictions and Optimal Monetary Policy in a Small Open Economy," BORRADORES DE ECONOMIA 012316, BANCO DE LA REPÚBLICA.

    More about this item

    Keywords

    BUSINESS CYCLES ; TRADE ; SIMULATION;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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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