Lectures in Open Economy Macroeconomics

Mart´in Uribe2
This draft, November 24, 2007

Contents

1 A First Look at the Data 1
2 An Endowment Economy 5
2.1 TheModel Economy . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Response to Output Shocks . . . . . . . . . . . . . . . . . . . 11
2.3 Nonstationary Income Shocks . . . . . . . . . . . . . . . . . 13
2.4 Testing theModel . . . . . . . . . . . . . . . . . . . . . . . . 18
3 An Economy with Capital 23
3.1 The Basic Framework . . . . . . . . . . . . . . . . . . . . . . 23
3.1.1 A Permanent Productivity Shock . . . . . . . . . . . . 26
3.1.2 A Temporary Productivity shock . . . . . . . . . . . . 29
3.2 Capital Adjustment Costs . . . . . . . . . . . . . . . . . . . . 30
3.2.1 Dynamics of the Capital Stock . . . . . . . . . . . . . 32
3.2.2 A Permanent Technology Shock . . . . . . . . . . . . . 34
4 The Real Business Cycle Model 37
4.1 TheModel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.2 The Model’s Performance . . . . . . . . . . . . . . . . . . . . 46
4.2.1 The Role of Capital Adjustment Costs . . . . . . . . . 48
4.3 Alternative Ways to Induce Stationarity . . . . . . . . . . . . 49
4.3.1 External Discount Factor (EDF) . . . . . . . . . . . . 50
4.3.2 External Debt-Elastic Interest Rate (EDEIR) . . . . 52
4.3.3 Internal Debt-Elastic Interest Rate (IDEIR) . . . . . 54
4.3.4 Portfolio Adjustment Costs (PAC) . . . . . . . . . . . 56
4.3.5 Complete Asset Markets (CAM) . . . . . . . . . . . . 58
4.3.6 The Nonstationary Case (NC) . . . . . . . . . . . . . 61
4.3.7 Quantitative Results . . . . . . . . . . . . . . . . . . . 61
4.4 Appendix A: Log-Linearization . . . . . . . . . . . . . . . . . 65
4.5 Appendix B: Solving Dynamic General Equilibrium Models . 67
4.6 Local Existence and Uniqueness of Equilibrium . . . . . . . . 78
4.7 SecondMoments . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.8 Impulse Response Functions . . . . . . . . . . . . . . . . . . . 83
4.9 Matlab Code For Linear Perturbation Methods . . . . . . . . 83
4.10 Higher Order Approximations . . . . . . . . . . . . . . . . . . 84
4.11 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
4.11.1 An RBC Small Open Economy with an internal debtelastic
interest-rate premium . . . . . . . . . . . . . . 85
5 The Terms of Trade 87
5.1 Defining the Terms of Trade . . . . . . . . . . . . . . . . . . . 88
5.2 Empirical Regularities . . . . . . . . . . . . . . . . . . . . . . 88
5.2.1 TOT-TB Correlation: Two Early Explanations . . . . 90
5.3 Terms-of-Trade Shocks in an RBC Model . . . . . . . . . . . 99
5.3.1 Households . . . . . . . . . . . . . . . . . . . . . . . . 99
5.3.2 Production of Consumption Goods . . . . . . . . . . . 102
5.3.3 Production of Tradable Consumption Goods . . . . . 103
5.3.4 Production of Importable, Exportable, and Nontradable
Goods . . . . . . . . . . . . . . . . . . . . . . . . 104
5.3.5 Market Clearing . . . . . . . . . . . . . . . . . . . . . 106
5.3.6 Driving Forces . . . . . . . . . . . . . . . . . . . . . . 106
5.3.7 Competitive Equilibrium . . . . . . . . . . . . . . . . 107
5.3.8 Calibration . . . . . . . . . . . . . . . . . . . . . . . . 107
5.3.9 Model Performance . . . . . . . . . . . . . . . . . . . . 111
5.3.10 How Important Are the Terms of Trade? . . . . . . . 113
6 Interest-Rate Shocks 115
6.1 An Empirical Model . . . . . . . . . . . . . . . . . . . . . . . 118
6.2 Impulse Response Functions . . . . . . . . . . . . . . . . . . . 120
6.3 Variance Decompositions . . . . . . . . . . . . . . . . . . . . . 126
6.4 A Theoretical Model . . . . . . . . . . . . . . . . . . . . . . . 131
6.4.1 Households . . . . . . . . . . . . . . . . . . . . . . . . 132
6.4.2 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
6.4.3 Driving Forces . . . . . . . . . . . . . . . . . . . . . . 141
6.4.4 Equilibrium, Functional Forms, and Parameter Values 142
6.5 Theoretical and Estimated Impulse Responses . . . . . . . . . 145
6.6 The Endogeneity of Country Spreads . . . . . . . . . . . . . . 147
7 Sovereign Debt 151
7.1 Empirical Regularities . . . . . . . . . . . . . . . . . . . . . . 152
7.2 The Cost of Default . . . . . . . . . . . . . . . . . . . . . . . 157
7.3 A Reputational Model of Sovereign Debt . . . . . . . . . . . . 159
7.4 Saving and the Breakdown of Reputational Lending . . . . . 166