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
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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.
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3
Q

HH problem

A

Usual Euler equation is obtained

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4
Q

Eq definition

A
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5
Q

National accounts identities

A
  • Capital account: -a dot
  • Balance of payments: CC+CK=0
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6
Q

National budget constraint

A

Increase in foreign assets equals GNP - absorption

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7
Q

National savings definition

A

Amount of income produced by the nationals that isn’t consumed by them

CC=savings-investment expenditure

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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

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9
Q

Steady state definition

A

k_t and q_t are constant

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10
Q

Phase diagram q,k

A
  • There is saddle path stability
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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
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12
Q

Transitional dynamics

A
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