Consider a deterministic small open economy populated by a large number of identical individuals receiving an endowment of income in every period. The preferences of the representative individual are described by the intertemporal utility function U0 = X 2 t=0 t u (ct) with = 1 1+ . In every period the individual faces the budget constraint ct+(1 + rt) dt1 = yt+dt. The initial debt holding is given by d 1 = 0. The foreign sector lends/borrows at the interest rate r = . All variables and parameters have standard interpretation. The endowment income grows over time and is given by: yt = t y, where y > 0, > 1 and t = 0; 1; 2. 1. Derive the intertemporal equilibrium allocation of the macroeconomic aggregates (consumption, assets, trade balance and current account) and give an economic interpretation to your results. [max 1000 words
Consider a deterministic small open economy populated by a large number
of identical individuals receiving an endowment of income in every period. The
preferences of the representative individual are described by the intertemporal
utility function U0 =
X
2
t=0
t
u (ct) with =
1
1+
. In every period the individual
faces the budget constraint ct+(1 + rt) dt1 = yt+dt. The initial debt holding is
given by d 1 = 0. The foreign sector lends/borrows at the interest rate r
= .
All variables and parameters have standard interpretation. The endowment
income grows over time and is given by: yt =
t
y, where y > 0, > 1 and
t = 0; 1; 2.
1. Derive the intertemporal equilibrium allocation of the macroeconomic aggregates (consumption, assets, trade balance and current account) and
give an economic interpretation to your results.
[max 1000 words]
2. Assume that in period t = 0 only there is a global Önancial crisis and
the foreign sector stops lending. Study the e§ects of the crisis on the
macroeconomic aggregates. Use your results to explain the macroeconomic
implications of credit constraints for a small open economy.
[max 1000 words]
ECN6620 CourseworkSpecimen ECN6620 Coursework – Spring Semester 2019-20
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