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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Trends and cycles in small open economies: making the case for a general equilibrium approach
Kan Chen
Mario J. Crucini
Abstract

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.


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Kan Chen & Mario J. Crucini, Trends and cycles in small open economies: making the case for a general equilibrium approach, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 279, 12 Aug 2016.
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DOI: 10.24149/gwp279
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