Basic Model

Abstract

Let us begin with the basic model under flexible exchange rates. In the current chapter, the limelight will be on the dynamics of foreign assets, private capital and money wages. First of all have a look at sections 1 until 3. As a base of comparison, the overlapping generations model will be sketched out briefly. Then we shall establish the IS—LM model of a small open economy with perfect capital mobility. There it proves useful to distinguish between the short—run equilibrium and the long—run equilibrium. Further the stability of the long—run equilibrium will be verified. In addition we shall trace out the processes of adjustment induced by diverse macroeco-nomic shocks. In doing this, money wages are assumed to be either flexible, fixed or slow. In section 4, we shall inquire into monetary policy as a dynamic instrument to overcome a macroeconomic disturbance. In section 5, a second country will be incorporated into the analysis. In section 6, we shall allow for capital gains on foreign assets, caused e.g. by a depreciation. To conclude, in section 7, a portfolio model will be elaborated to some extent.