Working Paper: NBER ID: w9270
Authors: Stephanie Schmitt-Grohe; Martin Uribe
Abstract: The small open economy model with incomplete asset markets features a steady state that depends on initial conditions and equilibrium dynamics that possess 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; and (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.
Keywords: No keywords provided
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model with endogenous discount factor (D15) | consumption stability (E21) |
| debt-elastic interest rate premium (E43) | interest rates (E43) |
| debt levels (H63) | interest rates (E43) |
| portfolio adjustment costs (G11) | asset dynamics (H82) |
| complete asset markets (G19) | smoother consumption dynamics (D15) |
| model structure (C52) | dynamic behavior (C69) |
| model specifications (C52) | consumption dynamics (E21) |