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External imbalances and collateral constraints in a two-country world

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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 external imbalances. Indeed 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 linkage between exchange rates, real assets and international capital flows. We focus on this mechanism so as to track the (international) transmission of shocks and the implications for the monetary policy. We show how developments hitting the house market can affect current account and exchange rate dynamics

Suggested Citation

  • Eleni Iliopulos, 2009. "External imbalances and collateral constraints in a two-country world," Documents de travail du Centre d'Economie de la Sorbonne 09065, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:09065
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    Cited by:

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    3. Benjamin Carton, 2011. "The Impossible Trinity Revised: An Application to China," Working Papers 2011-27, CEPII research center.
    4. SY Mouhamadou, 2015. "Working Paper 228 - Overborrowing and Balance of Payments Imbalances in a Monetary Union," Working Paper Series 2320, African Development Bank.

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    More about this item

    Keywords

    Open economy; durable goods; collateral constraints; sticky prices; simple monetary rules;
    All these keywords.

    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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