We examine how Sutton's "bounds" approach works in a small country where industries have relatively high export and import intensities. Import competition is used as an indicator for the degree of competition in the low sunk cost industries. The bounds are estimated as stochastic frontiers,...

This paper develops a small open economy model to investigate the impact of rising sovereign bond market spreads on the real economy. One key element of the model is a "sovereign risk channel" through which tensions in the sovereign bond market tend to spill over into private credit markets. The...

This paper studies the effects of discretionary fiscal policy shocks under different exchange rate regimes within a structural vector autoregressive (SVAR) model. We first suggest that by estimating the effects of fiscal policy shocks in two structurally similar small open economies that have...

The behaviour of the exchange rate under a floating exchange rate regime for a small open economy with perfect capital mobility may appear like a managed float or even a firmer peg. We present a canonical new neo-classical synthesis open economy model where the central bank follows a strategy...

This paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend...

This paper re-examines the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to the relative price of investment goods. It does so by developing a stylized two-sector real business cycle model which is simulated to explore its ability to shed new light on the...

This paper analyzes Korea’s exchange rate dynamics before and during the crisis of 1997-98 by estimating the long-run fundamental exchange rate and the associated error correction model. The analysis suggests that although Korea’s exchange rate was substantially overvalued before...

This paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution (i.e., the use of a foreign currency for domestic transactions) and risk premia on foreign borrowing. It shows that if currencies are substitute in...

We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority...

This study investigates quantitative properties of the transitional dynamics produced by gradual disinflation in a small open economy inhabited by heterogeneous consumers. The main exercise is to feed the empirically observed declining path for inflation into the calibrated model and account for...