Assumptions of the model and set up follows Jeanne and Ranciere (2011), however, their representative economy has no productive capital and investment. In this paper, adding productive capital and investment, the economy modelled as an endowment economy.
Our model is based on small open economy assumptions. There is only one good which is consumed domestically and abroad. Economy consist of discrete infinite time t=0,1,2… and has the risk of sudden stops which is the only reason of uncertainty. Therefore, economy follows a deterministic path which may be faced by sudden stops in capital inflows. There are two sectors in the economy, private and public.
The private sector consists of a continuum of atomistic and identical infinitely consumers …show more content…
Sudden stops decrease the consumer’s welfare in two channels. Firstly, if her elasticity of intertemporal substitution of consumption is finite, sudden stops reduce the consumption path around the trend level, which decreases the consumer’s welfare. Secondly sudden stops decrease the consumer’s intertemporal income because of a decrease in domestic output( Jeanne and Ranciere, 2011). It is obvious that consumption falls sharply at the time of the sudden stop under the cumulative impact of the fall in output and of the capital outflow. Eventually, consumption recovers as foreign capital flows back in. π shows the probability that a sudden stop occurs in the following period and at the end of a sudden stop episode the economy goes back to state n with …show more content…
However, our model differs from Jeanne and Ranciere (2011) in terms of depreciation rate δ, and growth rate g and productivity level, A. As mentioned above if p=1, there is no difference between the models because of right hand side is zero. If p<1 , then first part of the right hand side is positive. Taking partial derivatives of equation (17), we found a positive relationship between reserve level and depreciation rate δ, and growth rate g, but there is a negative relationship between reserve level and productivity. Last part of right hand side (g+δ): 0<δ<1 and r>g, than
There are three scenarios in this situation. First of all, if A=1, economy holds a relatively high level of reserves because of investment parameters g and δ, higher investment will cause to hold higher reserves. For a small open economy, higher growth may lead higher borrowing, which increases external debt of the country then economy might face of a sudden stop risk, therefore hold more reserves. If A < 1, economy needs, even higher reserves level. If A > 1, the country needs relatively less reserves
Our model is based on small open economy assumptions. There is only one good which is consumed domestically and abroad. Economy consist of discrete infinite time t=0,1,2… and has the risk of sudden stops which is the only reason of uncertainty. Therefore, economy follows a deterministic path which may be faced by sudden stops in capital inflows. There are two sectors in the economy, private and public.
The private sector consists of a continuum of atomistic and identical infinitely consumers …show more content…
Sudden stops decrease the consumer’s welfare in two channels. Firstly, if her elasticity of intertemporal substitution of consumption is finite, sudden stops reduce the consumption path around the trend level, which decreases the consumer’s welfare. Secondly sudden stops decrease the consumer’s intertemporal income because of a decrease in domestic output( Jeanne and Ranciere, 2011). It is obvious that consumption falls sharply at the time of the sudden stop under the cumulative impact of the fall in output and of the capital outflow. Eventually, consumption recovers as foreign capital flows back in. π shows the probability that a sudden stop occurs in the following period and at the end of a sudden stop episode the economy goes back to state n with …show more content…
However, our model differs from Jeanne and Ranciere (2011) in terms of depreciation rate δ, and growth rate g and productivity level, A. As mentioned above if p=1, there is no difference between the models because of right hand side is zero. If p<1 , then first part of the right hand side is positive. Taking partial derivatives of equation (17), we found a positive relationship between reserve level and depreciation rate δ, and growth rate g, but there is a negative relationship between reserve level and productivity. Last part of right hand side (g+δ): 0<δ<1 and r>g, than
There are three scenarios in this situation. First of all, if A=1, economy holds a relatively high level of reserves because of investment parameters g and δ, higher investment will cause to hold higher reserves. For a small open economy, higher growth may lead higher borrowing, which increases external debt of the country then economy might face of a sudden stop risk, therefore hold more reserves. If A < 1, economy needs, even higher reserves level. If A > 1, the country needs relatively less reserves