Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/79190 
Year of Publication: 
2001
Series/Report no.: 
Working Paper No. 2001-15
Publisher: 
Rutgers University, Department of Economics, New Brunswick, NJ
Abstract: 
The small open economy model with incomplete asset markets features a steady state that depends on initial conditions. In addition, equilibrium dynamics posses a random walk component. A number of modifications to the standard model have been proposed to induce stationarity. This paper presents a quantitative comparison of these alternative approaches. Five different specifications are considered: (1) A model with an endogenous discount factor (Uzawa-type preferences); (2) A model with a debt-elastic interest-rate premium; (3) A model with convex portfolio adjustment costs; (4) A model with complete asset markets; (5) A model without stationarity-inducing features. The main finding of the paper is that all models deliver virtually identical dynamics at business-cycle frequencies, as measured by unconditional second moments and impulse response functions. The only noticeable difference among the alternative specifications is that the complete-asset-market model induces smoother consumption dynamics.
Subjects: 
Complete and Incomplete Asset Markets
Small Open Economy
Stationarity
JEL: 
F41
Document Type: 
Working Paper

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