Welfare Effect of Productivity Shocks and Policy Implications in a Small Open Economy

2012 ◽  
Vol 11 (2) ◽  
pp. 290-319 ◽  
Author(s):  
Richard E. Ericson ◽  
Xuan Liu
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Policy Implication ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Welfare Effect ◽  
Policy Implications ◽  
Real Business Cycle ◽  
Productivity Shocks

Abstract We examine the welfare effect and policy implications of productivity shocks in a small open economy. With real business cycle models, productivity shocks are generally welfare improving. However, once we assign a big role to financial frictions, productivity shocks may become welfare deteriorating. These results are robust. Moreover, the policy implication hinges on preferences, policy specifications, and financial frictions.

scholarly journals Welfare Cost of Model Uncertainty in a Small Open Economy

Entropy ◽  
2020 ◽  
Vol 22 (11) ◽  
pp. 1221
Author(s):  
Jocelyn Tapia Stefanoni
Keyword(s):  
Business Cycle ◽  
Risk Aversion ◽  
Open Economy ◽  
Model Uncertainty ◽  
Small Open Economy ◽  
Closed Form Solution ◽  
Model Parameters ◽  
Household Welfare ◽  
Real Business Cycle ◽  
Ambiguous Effect

This paper extends the canonical small open-economy real-business-cycle model, when considering model uncertainty. Domestic households have multiplier preferences, which leads them to take robust decisions in response to possible model misspecification for the economy’s aggregate productivity. Using perturbation methods, the paper extends the literature on real business cycle models by deriving a closed-form solution for the combined welfare effect of the two sources of uncertainty, namely risk and model uncertainty. While classical risk has an ambiguous effect on welfare, the addition of model uncertainty is unambiguously welfare-deteriorating. Hence, the overall effect of uncertainty on welfare is ambiguous, depending on consumers preferences and model parameters. The paper provides numerical results for the welfare effects of uncertainty measured by units of consumption equivalence. At moderate (high) levels of risk aversion, the effect of risk on household welfare is positive (negative). The addition of model uncertainty—for all levels of concern about model uncertainty and most risk aversion values—turns the overall effect of uncertainty on household welfare negative. It is important to remark that the analytical decomposition and combination of the effects of the two types of uncertainty considered here and the resulting ambiguous effect on overall welfare have not been derived in the previous literature on small open economies.

THE ROLE OF FOREIGN DEBT AND FINANCIAL FRICTIONS IN A SMALL OPEN ECONOMY DSGE MODEL

2016 ◽  
Vol 61 (05) ◽  
pp. 1550077
Author(s):  
MYUNG-SOO YIE ◽  
BYOUNG HARK YOO
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Risk Premium ◽  
Financial Frictions ◽  
Foreign Debt ◽  
Small Open Economy ◽  
State Level ◽  
Korean Economy ◽  
Dynamic Stochastic

We examine the role of foreign debt and financial frictions in the Korean business cycle using a small open economy DSGE (dynamic stochastic general equilibrium) model where domestic banks borrow external funds, denominated in foreign currencies, for a risk premium and make loans to domestic producers. We find that the Korean economy is ‘financially vulnerable’, which means that the risk premium increases when the domestic currency depreciates. As a result, depreciation could cause recession, rather than expansion, when there exist substantial amount of foreign debt or financial frictions. A simulation shows that the Korean business cycle would suffer less volatility with a lower steady-state level of foreign debt or no financial frictions.

scholarly journals The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Phuong V. Nguyen
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Research Paper ◽  
New Keynesian ◽  
Dsge Model ◽  
Content Type ◽  
Business Cycle Fluctuations ◽  
Dynamic Stochastic ◽  
The Business Cycle

PurposeThe primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.Design/methodology/approachA SOE-NK-DSGE model—Bayesian estimation.FindingsThis paper analyzes the sources of the business cycle fluctuations in Vietnam.Originality/valueThis research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

scholarly journals Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

2015 ◽  
Vol 7 (3) ◽  
pp. 153-188 ◽  
Author(s):  
Andrés Fernández ◽  
Adam Gulan
Keyword(s):  
Business Cycles ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Financial Data ◽  
Cycle Model ◽  
Business Cycle Model

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

HOW DIFFERENT IS THE CYCLICAL BEHAVIOR OF HOME PRODUCTION ACROSS COUNTRIES?

2007 ◽  
Vol 11 (1) ◽  
pp. 56-78 ◽  
Author(s):  
WILLIAM BLANKENAU ◽  
M. AYHAN KOSE
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Household Production ◽  
The United States ◽  
Home Production ◽  
Business Cycle Model ◽  
Market Variables ◽  
Highly Correlated ◽  
Market Output

This paper studies stylized business-cycle properties of household production in four industrialized countries (Canada, the United States, Germany, and Japan). We employ a dynamic small open-economy business-cycle model that incorporates a household production sector. We use the model to generate data on home output, hours worked in the home sector, and hours spent on leisure. We find that in each country, home output is more volatile than market output, whereas home sector hours are about as volatile as those in the market sector. In each country, leisure is the least volatile series. Leisure hours and home hours are countercyclical in all countries, and home output is not highly correlated with market output. Home sector variables are generally less persistent than market variables and cross-country correlations related to home production tend to be lower than those related to market production. These findings demonstrate that despite some well-known structural differences in labor markets, the cyclical features of home sector variables are similar across the countries we consider.

Business cycle dynamics in a small open economy

2008 ◽  
Vol 15 (15) ◽  
pp. 1153-1157
Author(s):  
Valerie Cerra ◽  
Sweta C. Saxena
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Business Cycle Dynamics

scholarly journals Trade in Commodities and Business Cycle Volatility

2021 ◽  
Vol 13 (3) ◽  
pp. 173-208
Author(s):  
David Kohn ◽  
Fernando Leibovici ◽  
Håkon Tretvoll
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Emerging Economies ◽  
Small Open Economy ◽  
Commodity Price ◽  
Cross Sectional ◽  
Developed Economies ◽  
Show Evidence ◽  
The Business Cycle ◽  
Sectoral Trade Flows

This paper studies the role of differences in the patterns of production and international trade on the business cycle volatility of emerging and developed economies. We study a multisector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional and time-series differences across countries. Emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to commodity price fluctuations. We show evidence consistent with this mechanism using cross-country data. (JEL E23, E32, F14, F41, F44)

scholarly journals Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule

2021 ◽  
Author(s):  
Rogelio De la Peña
Keyword(s):  
Monetary Policy ◽  
Open Economy ◽  
Monopolistic Competition ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Central Banks ◽  
Welfare Cost ◽  
Policy Regimes ◽  
Policy Objectives ◽  
Single Instrument

It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.

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