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Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy

Author

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  • Wang, Gaowang
  • Zou, Heng-fu

Abstract

This paper develops a simple mercantilism model for a small open economy and examines the real effects of macroeconomic policies. In this setting, the saddle-point stability of the model with wealth effects hinges on an interesting "relative smoothness condition" for foreign asset accumulation. And comparative static analysis shows that an increase of monetary growth rate and a central-bank purchase of foreign exchange have positive real effects on the economy. In contrast, an increase of government expenditure always has negative effects on the economy. Moreover, the stronger of the mercantilist sentiments, the more consumption, real money balance holdings and foreign asset accumulation in the long run. These conclusions are very different from those ridiculous ones of Obstfeld's paper (1981).

Suggested Citation

  • Wang, Gaowang & Zou, Heng-fu, 2011. "Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy," MPRA Paper 34519, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:34519
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    File URL: https://mpra.ub.uni-muenchen.de/34519/1/MPRA_paper_34519.pdf
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    References listed on IDEAS

    as
    1. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-797, August.
    2. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 251-270.
    3. Robert Barro, 2003. "Optimal Management of Indexed and Nominal Debt," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 1-15, May.
    4. Smith, Adam, 1977. "An Inquiry into the Nature and Causes of the Wealth of Nations," University of Chicago Press Economics Books, University of Chicago Press, number 9780226763743 edited by Cannan, Edwin.
    5. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    6. Heng-Fu Zou, 1997. "Dynamic analysis in the Viner model of mercantilism," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 637-651, August.
    7. Shouyong Shi, 2001. "Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 325-351, November.
    8. Jianjun Miao, 2004. "A Note on Consumption and Savings under Knightian Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 299-311, November.
    9. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August.
    10. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    11. S. Rao Aiyagari & Ellen R. McGrattan, 2003. "The Optimum Quantity of Debt: Technical Appendix," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 193-217, May.
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    More about this item

    Keywords

    Mercantilism; Foreign Asset Accumulation; Relative Smoothness Condition;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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