NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trends and Cycles in Small Open Economies: Making The Case For A General Equilibrium Approach

Kan Chen, Mario Crucini

NBER Working Paper No. 22460
Issued in July 2016
NBER Program(s):EFG, IFM

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

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Document Object Identifier (DOI): 10.3386/w22460

Published: Chen, Kan & Crucini, Mario J., 2016. "Trends and cycles in small open economies: making the case for a general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 159-168. citation courtesy of

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