Working Paper: NBER ID: w1407
Authors: Stephen J. Turnovsky
Abstract: This paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are derived from optimization by the private sector. In this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy. In response to a disturbance in either the foreign interest rate or inflation rate,the economy undergoes an initial partial jump towards its new equilibrium,which it there after approaches gradually. The implications of these results for exchange rate adjustment and the insulation properties of flexible exchange rates are discussed.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic monetary growth rate increase (O42) | Instantaneous jump in economy (F69) |
| Instantaneous jump in economy (F69) | Change in exchange rate (F31) |
| Domestic monetary growth rate increase (O42) | Change in real money balances (E41) |
| Increase in domestic government expenditure (H59) | Rise in employment (J23) |
| Increase in domestic government expenditure (H59) | Fall in consumption (E21) |
| Increase in foreign nominal interest rate (E43) | Rise in equilibrium stock of traded bonds (G12) |
| Rise in equilibrium stock of traded bonds (G12) | Negative effect on domestic consumption (D12) |
| Rise in equilibrium stock of traded bonds (G12) | Negative effect on employment (F66) |