The Effects of Macroeconomic Shocks in a Basic Equilibrium Framework

The macroeconomic effects of random shocks to output, the terms of trade, and the real interest rate are examined using an intertemporal equilibrium model of a small open, endowment economy. Equilibrium stochastic processes are computed numerically and compared with actual stylized facts. The model rationalizes the Harberger-Laursen-Metzler effect, but cannot produce countercyclical net exports and large real exchange rate fluctuations. The quantitative implications of the model are compared with the implications of the elasticities approach, and their sensitivity to changes in preference parameters and in the persistence of shocks is examined.