SERIES 16-2012 Money , Growth and External Balance in a Small Open Economy (original) (raw)
Related papers
Money, Growth and External Balance in a Small Open Economy
SSRN Electronic Journal, 2000
This paper puts forward an intertemporal model of a small open economy to analyze the effects of money, government debt and real shocks on growth, inflation and external balance. The model is an endogenous growth, overlapping generations model, with money in the utility function, convex adjustment costs for investment, and perfect substitutability between domestic and foreign bonds. It is shown that the growth rate depends only on the world real interest rate, the productivity of domestic capital, the adjustment cost parameter for investment and the depreciation rate. It does not depend on money, budgetary policies or the preferences of domestic consumers. Consumption of goods and services and external balance, in addition to the world real interest rate and the domestic productivity of capital, depend on money, budgetary policies and the preferences of domestic consumers. The model is used to analyze the full effects of real and monetary shocks. Monetary growth is not superneutral in this model, as it affects domestic consumption and the net foreign position of the economy.
SSRN Electronic Journal, 2000
This paper examines the effects of government debt policies with imperfect substitutability between securities issued by different countries. It puts forward an intertemporal model of a small open economy to analyze the effects of government debt on the real interest rate, economic growth, private consumption and the balance of payments. The model is an endogenous growth, overlapping generations model with convex adjustment costs for investment, and imperfect substitutability between domestic and foreign bonds. It is shown than an increase in the government debt to output ratio causes the spread between the domestic and the foreign real interest rate to rise and the endogenous growth rate to fall. In addition, when domestic government bonds are relatively close substitutes for foreign bonds, the rise in government debt causes a temporary rise in domestic consumption, as current generations view government debt as wealth. The current account moves into deficit, the economy decumulates net foreign assets, and in the new long run equilibrium both the consumption to output ratio and net foreign assets as a proportion of output fall. When domestic government bonds are not close substitutes for foreign bonds, the rise in government debt causes a temporary fall in domestic consumption, as the negative real interest rate effect of the rise in government debt dominates the wealth effect. In this case the current account improves and in the new long run equilibrium both the consumption to output ratio and net foreign assets as a proportion of output rise.
SERIES 15-2012 Endogenous Growth and External Balance in a Small Open Economy
2012
This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is small in the sense of being a price taker in international goods and assets markets. The endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment. The endogenous growth rate is independent of domestic savings and the preferences of consumers. Given the domestic growth and investment rate, the preferences of consumers determine the current account and external balance. The model can also be used to analyze the implications of budgetary policy. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate. This model addresses and resolves the indeterminancy problems that arise in comparable representative household endogenous growth models of small open economies.
Endogenous Growth and External Balance in a Small Open Economy
Open Economies Review, 2013
This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate.
Anticipated policy and endogenous growth in a small open monetary economy
Journal of International Money and Finance, 2005
This paper analyzes the effects of a preannounced change in the growth rate of credit in a small open economy. The model, based on an endogenous growth model, introduces the adjustment costs for investment and the role of money in the production function and highlights the dynamic behavior of an open economy. We show that an increase in the rate of anticipated credit growth lowers the steady-growth rate of capital, real money balances, and real output. We also find that the rate of depreciation of the domestic currency will rise steadily toward its stationary level. The anticipated domestic credit growth hence exhibits monetary nonsuperneutrality in both the rate and the level of output in the intermediate and the long run.
Devaluation, Asymmetric Money Demand, and Investment in a Small Open Economy
Review of International Economics, 1997
This paper investigates the relationship between inflation and investment when cash is required to purchase some consumption goods in a small open economy while others are purchased with foreign currency or on credit. Devaluation acts as a differential tax on the good that must be purchased with domestic money and lowers the return to the factor used intensively in this sector. If this sector is relatively labor intensive, the steady-state capital stock will increase in response to higher inflation. Nonneutrality of inflation exists even though money is only held for consumption purposes.
Journal of International Money and Finance, 2010
This paper develops a small open economy model in the spirit of Obstfeld and Rogoff (1995). The introduction of endogenous traded sector output unlocks current account and real exchange rate effects. Within this framework where specific consideration is given to the case with fixed but adjustable parities, exchange rate devaluation generates similar qualitative effects as a money supply expansion under floating rates. Output and external effects of government spending shocks are broadly consistent with the adjusted basic non-micro founded Mundell and Fleming (MF) framework, but differ in significant ways from the baseline MF model. Contrary to the textbook MF model a government expenditure shock depreciates the nominal exchange rate and generates real effects under the fixed rate system.
Econometrica, 1965
The cash in advance and money in utility function models are used to examine whether the nature of fluctuations in economic activities and welfare in three interdependent economies are related to the stocks and growth rate of money. When the money is exogenously introduced in the form of cash in advance, it serves as a medium of exchange and the rate of return in real and nominal assets become equal. Idiosyncratic technological shocks generate fluctuations in the growth rates of capital, output, prices, money, consumption, investment, labour supply and lifetime utilities of households. When households have money endogenously in their utility functions, the stock of money in excess of that required for transactions causes inflation and reduces the amount of capital stock and output in these economies. Both CIA and MIU models support for a steady growth rate of money according to the growth rate of output. While the inflation targeting by manipulating the interest rates for macroeconomic stability is theoretically a prudent policy move, it is impossible for a central bank to eliminate business cycles that arise from shocks to production technology or to other structural features of an economy.
Fiscal and Monetary Policy in a Basic Endogenous Growth Model
Computational Economics, 2014
We present a monetary endogenous growth model and analyze the effects of fiscal and monetary policy with real money as an argument in the utility function. We show that a balanced government budget gives a higher balanced growth rate and lower inflation than a situation with permanent public deficits. It also leads to higher welfare compared to a situation with permanent deficits where the government does not put a high weight on stabilizing debt. However, when governments run deficits with a high weight on stabilizing debt, comparative welfare effects depend on the initial conditions with respect to public debt. Further, for a given monetary policy a stricter debt policy yields higher growth, lower inflation and higher welfare. A rise in the nominal money supply can compensate the negative growh effects of a loose debt policy up to a certain point but only at the cost of higher inflation and lower welfare.
Money and Business Cycle in a Small Open Economy
2000
This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.