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

Kan Chen and Mario Crucini ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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 modelling 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.

Pages: 31 pages
Date: 2014-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (3)

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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 (2016)
Working Paper: Trends and cycles in small open economies: making the case for a general equilibrium approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2014-76

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