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

Kan Chen and Mario Crucini ()

No 22460, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C55 C68 F41 F44 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-dge and nep-opm
Note: EFG IFM
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Citations: View citations in EconPapers (8)

Published as 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.

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Related works:
Journal Article: Trends and cycles in small open economies: making the case for a general equilibrium approach (2016)
Working Paper: Trends and cycles in small open economies: Making the case for a general equilibrium approach (2016)
Working Paper: Trends and cycles in small open economies: making the case for a general equilibrium approach (2016)
Working Paper: Trends and Cycles in Small Open Economies: Making The Case For A General Equilibrium Approach (2014)
Working Paper: Trends and cycles in small open economies: making the case for a general equilibrium approach (2014)
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