Oliver de Groot , C. Bora Durdu , Enrique G. Mendoza
{"title":"Why global and local solutions of open-economy models with incomplete markets differ and why it matters","authors":"Oliver de Groot , C. Bora Durdu , Enrique G. Mendoza","doi":"10.1016/j.jinteco.2025.104142","DOIUrl":null,"url":null,"abstract":"<div><div>We compare global (fixed-point iteration) and local (first-order, higher-order, risky-steady-state, and quasi-linear) solutions of open-economy incomplete-markets models. Cyclical moments of a workhorse endowment model are broadly in line with the data and similar across solutions calibrated to the same data targets, but impulse responses and spectral densities differ. Alternative local solutions yield nearly identical results. Calibrating them requires nontrivial interest-rate elasticities that make net foreign assets (NFA) “sticky,” causing them to differ sharply from global solutions in experiments altering precautionary savings (e.g., increasing income volatility, adding capital controls). Analytic and numerical results show that our findings are due to the near-unit-root nature of NFA under incomplete markets and imprecise solutions of their autocorrelation. These findings extend to a Sudden Stops model with an occasionally binding collateral constraint. In addition, quasi-linear methods yield smaller financial premia and macroeconomic responses when the constraint binds.</div></div>","PeriodicalId":16276,"journal":{"name":"Journal of International Economics","volume":"158 ","pages":"Article 104142"},"PeriodicalIF":4.0000,"publicationDate":"2025-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of International Economics","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0022199625000996","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
We compare global (fixed-point iteration) and local (first-order, higher-order, risky-steady-state, and quasi-linear) solutions of open-economy incomplete-markets models. Cyclical moments of a workhorse endowment model are broadly in line with the data and similar across solutions calibrated to the same data targets, but impulse responses and spectral densities differ. Alternative local solutions yield nearly identical results. Calibrating them requires nontrivial interest-rate elasticities that make net foreign assets (NFA) “sticky,” causing them to differ sharply from global solutions in experiments altering precautionary savings (e.g., increasing income volatility, adding capital controls). Analytic and numerical results show that our findings are due to the near-unit-root nature of NFA under incomplete markets and imprecise solutions of their autocorrelation. These findings extend to a Sudden Stops model with an occasionally binding collateral constraint. In addition, quasi-linear methods yield smaller financial premia and macroeconomic responses when the constraint binds.
期刊介绍:
The Journal of International Economics is intended to serve as the primary outlet for theoretical and empirical research in all areas of international economics. These include, but are not limited to the following: trade patterns, commercial policy; international institutions; exchange rates; open economy macroeconomics; international finance; international factor mobility. The Journal especially encourages the submission of articles which are empirical in nature, or deal with issues of open economy macroeconomics and international finance. Theoretical work submitted to the Journal should be original in its motivation or modelling structure. Empirical analysis should be based on a theoretical framework, and should be capable of replication.