TY  - JOUR
AU  - Schmitt-Grohe,Stephanie
AU  - Uribe,Martin
TI  - Closing Small Open Economy Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9270
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9270
L1  - http://www.nber.org/papers/w9270.pdf
N1  - Author contact info:
Stephanie Schmitt-Grohe
Department of Economics
Columbia University
New York, NY 10027
Tel: 212/854-8059
Fax: 212/854-4010
E-Mail: stephanie.schmittgrohe@columbia.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - 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.
ER  -