In this paper, we formulate a discrete time version of the Kaldorian macrodynamic model in a small open economy with fixed exchange rates. The model is described by a system of the three-dimensional nonlinear difference equations with and without stochastic disturbances (noise effects). We study the local stability/instability properties analytically by using the linear approximation method, and chaotic dynamics with and without noise effects are investigated by means of numerical simulations. In general, it is believed that the effect of the noise is to obscure the basic structure of the system. But, this is not necessarily the case. We show by means of numerical analysis that the noise can reveal the hidden structure of the model contrary to the usual intuition in some situations.
Relative Price Risk in the Open Economy -- The Case of Fixed Exchange Rates
