Article ID: | iaor201111990 |
Volume: | 44 |
Issue: | 4 |
Start Page Number: | 1350 |
End Page Number: | 1368 |
Publication Date: | Nov 2011 |
Journal: | Canadian Journal of Economics/Revue canadienne d'conomique |
Authors: | Janko Zuzana |
Keywords: | simulation, risk |
It is well known that real business cycle small open economy (SOE) models rely on Greenwood, Hercowitz, and Huffman (1988) preferences to match the countercyclical trade balance observed in open economies, as well as other second moments, while standard preferences la King, Plosser, and Rebelo (1988) are commonly labelled ‘ineffective,’ owing to their inability to yield the countercyclical trade balance. In this paper, I show that an SOE model with standard preferences and ‘involuntary’ unemployment with efficient risk sharing can obtain a countercyclical trade balance and match main empirical regularities in small open economies.