Stationarity-Inducing Techniques in Small Open Economy Models with Collateral Constraints

I show that the alternative stationarity-inducing techniques that have been used to “close” the standard small open economy model (like an endogenous discount factor and a debt-elastic interest rate premium) have different implications for the equilibrium dynamics once I add a commonly-used collateral-type financial constraint. Given this non-equivalence, my results further show that a small open economy model with a credit constraint that embodies an endogenous discount factor is superior to the debt-elastic interest rate model when one tries to match this kind of models to the data.

Multiple Equilibria in Open Economies with Collateral Constraints

This article establishes the existence of multiple equilibria in infinite-horizon open economy models in which the value of tradable and non-tradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induce agents to deleverage. Under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.

Economic Growth, Foreign Direct Investment and the Environment: An Empirical Investigation for SAARC Countries

The study tests the validity of the environmental Kuznets curve (EKC) for SAARC countries by using closed and open economy Models. The Peroni Panel Cointegration technique along with FMOLS estimation techniques have been used for empirical analysis by using the data from 1972-2015. The long run and short run estimates of the closed economy model reveals positive and significant relationship between Per capita GDP, per capita GDP2 and the carbon emissions that deny the existence of EKC. The findings of open economy model signify that FDI not only helps to transfer cleaner technologies, but it enables the producers to use less pollutant technologies for the production purposes. Moreover, an increase in the forest area is helpful for reducing the carbon emissions. Finally, population density and energy consumption are proved significant contributors of carbon emissions. The study suggests that effective policies should be followed for reducing emissions, regulating FDI-environment and per capita GDP environment relationship.