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Abstract:
Several methods have been proposed to obtain stationarity in open economy models with incomplete financial markets. I show that in a model with possibly multiple steady states, these methods can substantially impact the dynamic properties of the model. Convex portfolio costs, debt elastic interest rates, or an overlapping generations model allow for multiple steady state if the underlying static model has multiple locally isolated equilibria. Steady states for which the excess demand function is upward sloping are unstable. If the model is closed using Uzawa-type preferences (endogenous discount factor), the steady state is always unique and stable.
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Keywords
Stationarity, incomplete markets, open economy
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