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Reviving the Salter-Swan small open economy model

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín
Abstract
This paper provides microfoundations to the Salter-Swan policy framework, a graphical apparatus designed to ascertain the exchange-rate and fiscal stance of a policymaker with internal and external economic targets. The environment is an infinite-horizon small open economy producing tradable and nontradable goods that takes world prices and world interest rates as given and is populated by optimizing households and firms. The economy is subject to terms of trade, interest rate, and discount factor shocks. The internal target of the government is the unemployment rate and the external target is the current account. Downward nominal wage rigidity and financial frictions serve as the rationale for meaningful policy intervention.

Suggested Citation

  • Schmitt-Grohé, Stephanie & Uribe, Martín, 2021. "Reviving the Salter-Swan small open economy model," Journal of International Economics, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:inecon:v:130:y:2021:i:c:s0022199621000180
    DOI: 10.1016/j.jinteco.2021.103441
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    2. Prema‐chandra Athukorala & Hal Hill & Sisira Jayasuriya, 2021. "Economist as public intellectual: Max Corden’s journey through life," The World Economy, Wiley Blackwell, vol. 44(6), pages 1472-1483, June.
    3. Davies, Martin & Schröder, Marcel, 2022. "The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market," ADB Economics Working Paper Series 663, Asian Development Bank.

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    More about this item

    Keywords

    Internal balance; External balance; Small open economy; Salter Swan diagram; Exchange rate policy; Fiscal policy; Nontradable goods;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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