DP996 Business Cycles in a Small Open Economy

Author(s): Isabel Correia, Joao C Neves, Sérgio Rebelo
Publication Date: July 1994
Keyword(s): Business Cycles, Open Economy, Trade Balance
JEL(s): E32, F32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=996

This paper discusses a dynamic model that is consistent with the main empirical regularities of economic fluctuations in open economies. While other models in this class have relied on non-separable preferences or finite horizons to generate a realistic consumption volatility, we show that there is a simple class of time separable preferences that is consistent with the cyclical volatilities of the components of the national income accounts identity as well as with the countercyclical character of the balance of trade.