Open economy Flashcards
1
Q
Assumptions
A
Firm
- Representative firm
- Buys investment good at a price of 1 per unit (it owns capital stock)
- Hires labor at w_t
HH
- Representative household
- Supplies labor inelastically
- Consumption and saving decision
- Owns the firms
2
Q
Firm problem
A
Current value hamiltonian is used
- Cost function has the usual properties of the adjustment cost
- Since the labor decision is static, we can first choose the optimal labor level and then we just replace in the cashflow function.
- Then the problem is one of choosing the optimal investment path with the profits set at the optimal labor level.
3
Q
HH problem
A
Usual Euler equation is obtained
4
Q
Eq definition
A
5
Q
National accounts identities
A
- Capital account: -a dot
- Balance of payments: CC+CK=0
6
Q
National budget constraint
A
Increase in foreign assets equals GNP - absorption
7
Q
National savings definition
A
Amount of income produced by the nationals that isn’t consumed by them
CC=savings-investment expenditure
8
Q
Intertemporal budget constraint
A
Since the euler equation requires constant consumption, then the consumption is equal to r*w, where w is the permanent income
9
Q
Steady state definition
A
k_t and q_t are constant
10
Q
Phase diagram q,k
A
- There is saddle path stability
11
Q
Implications
A
- Investment only depends on q and r. Household preferences are irrelevant for the investment path
- Income earned on foreing assets allows to finance a negative trade balance. We can have negative net exports in steady state if we have a stream of income from foreign assets to pay for it
- In ss current account balance stays constant at zero
- If there is an innovation in the permanent income society updates immediately its consumption level
- Notice euler equation requires constant consumption
12
Q
Transitional dynamics
A
