The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Closing Large Open Economy Models
Martin Bodenstein
2006-867  (August 2006, latest version March 2011)

Abstract:  A large class of international business cycle models admits multiple locally isolated deterministic steady states, if the elasticity of substitution between traded goods is sufficiently low. I explore the conditions under which such multiplicity occurs and characterize the dynamic properties in the neighborhood of each steady state. Models with standard incomplete markets, portfolio costs, a debt-elastic interest rate, or an overlapping generations framework allow for multiple steady states, if the model features multiple steady states under financial autarchy. If the excess demand for the foreign traded good is increasing in the good's own price in a given steady state, the equilibrium dynamics around this steady state are unbounded. Otherwise, the dynamics are bounded and unique. By contrast, with Uzawa-type preferences, the steady state is always unique and the associated equilibrium dynamics are always bounded and unique. The same results obtain under complete markets.

Full paper , latest version (690 KB PDF) | Full paper (screen reader version)
Original version (720 KB PDF)

Stationarity, incomplete markets, open economy, multiple equilibria

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2006 IFDPs
Accessibility | Contact Us
Last update: May 20, 2011