Dynamic Stochastic Analysis Of A Small Open Economy

This thesis consists of four essays that study the dynamic stochastic behavior of a small open economy. In the framework studied here, rational individuals formulate optimal intertemporal plans in an environment where domestic capital and foreign financial assets are used as alternative vehicles of savings, and where random disturbances affect the production technology or the international terms of trade. As demonstrated in the papers, the separation of savings and investment decisions that characterizes the individual\u27s optimal plans in open economies has important implications for the evolution of macroeconomic aggregates.;The main contribution of this work is that it undertakes a quantitative exploration of the equilibrium stochastic process that characterizes the long-run dynamics of the small open economy. Chapters II, III and IV focus on different applications of this computational general-equilibrium modelling strategy, whereas the first chapter concentrates on a purely theoretical analysis. The thesis is ordered as follows. Chapter I presents a dynamic stochastic model and applies dynamic programming techniques to analyze impact and dynamic effects of transitory and persistent disturbances. The potential for this model to explain the kind of comovement and persistence observed in real-world macroeconomic data is formally established. The second essay employs dynamic numerical simulations methods to study the ability of the artificial economy to mimic the stylized facts and typify Canadian business cycles, including the correlation between savings and investment. Since the results of this analysis suggest that the model allows the domestic capital stock to be adjusted too easily, the third paper investigates how the quantitative performance of the model is improved by introducing capital-adjustment costs. The resulting prototype replicates the majority of the Canadian stylized facts, and thus it constitutes a useful tool for dynamic policy analysis. The last paper utilizes this improved version of the model to quantitatively determine the effects of a policy that stabilizes the balance of trade by introducing tax-enforced capital controls. The results of this experiment indicate that, given the moderate magnitude of typical business cycles in the post-war period, the mentioned policy has minimal effects on economic activity and economic welfare