A Rational Expectations Equilibrium Model Of A Small, Specialized Economy

In this thesis, a rational expectations equilibrium model of the business cycle in a small, open, specialized economy is formulated and tested. The business cycle is as much a fact in small developing economies as in large industrialized ones. Much recent work on business cycles in closed economies and large open economies has employed a rational expectations equilibrium framework with incomplete information and this is the approach used in this thesis. The model developed is specifically designed to capture the essential features of small developing economies. The economies modelled here are highly specialized and export oriented, are price takers in international markets, and face volatile and hard to predict terms of trade.;The decision rules of agents are derived from explicit stochastic dynamic optimization problems. As in most formulations of the natural rate hypothesis, much emphasis is placed on uncertainty about relative prices as a source of confusion which helps to generate the cycle. The key relative price about which there is uncertainty is the terms of trade.;The model makes predictions about the behaviour of output. Output is predicted to follow a stochastic difference equation disturbed by unanticipated movements in the terms of trade and the world price level, as well as by a serially correlated productivity shock. The model also makes predictions about the balance of payments, the price level, and the exchange rate but these are contingent upon the predictions for output being correct.;The predictions of the model for the behaviour of output are tested using data for 13 developing countries in the Caribbean, Central America, Africa, and South-East Asia. The model is also tested against simple Keynesian and classical alternatives. Some, though not complete, support is found for the model. The restrictions of the model are not rejected for most countries. One interesting finding is that real variables outweigh nominal variables in explaining the cycle