Technology shocks under varying degrees of financial openness

The objective of this paper is to analyze the implications of varying degrees of financial openness for the impact of technology shocks on a real, small open economy with financial and informational frictions. Aggregate fluctuations and propagation mechanisms under increasing financial openness are investigated in a dynamic, stochastic, general equilibrium framework in the case of positive technology shocks. The imperfections in the economy in the form of informational asymmetries among the agents and uncertainty in the production process necessitate financial intermediation and collateralized borrowing in the economy. The reason to abstract from money in the setup of the framework is to be able to concentrate on the real implications of increasing financial openness for the effect of technology shocks, business cycle implications of which have long been discussed in the literature. It is shown that increasing financial openness amplifies the impact of positive, temporary technology shocks on output, investment, consumption, labor supply and net exports.