T hese days macroeconomics has become more respectable than it used to be. I can remember when many economists liked to say: Microeconomics is not problematic, but I just don’t understand macroeconomics. There was a definite implication that something must be wrong with macroeconomics, not with the observer. Of course macroeconomics cannot be “exact;” it has to work by rough analogy and empiric...

I n an open macroeconomy, in which asset trade is possible, the portfolio choice of households may play an important role in understanding macro fluctuations. In contrast to a closed economy model, in which a representative agent simply holds the market portfolio, agents in each country may hold different portfolios depending on the country-specific risks and returns that they encounter. Robert...

The " Sudden Stop " phenomenon of the recurrent emerging markets crises of the last ten years is one of the key questions facing International Macroeconomics. Sudden Stops are defined by unusually large recessions marked by: sharp, abrupt current account reversals, large contractions in output and absorption, and collapses in goods and asset prices. In Mexico's 1995 Sudden Stop, for example, th...

We study a small open economy characterized by two empirically important frictions – incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate cap...

Business cycles in emerging market economies are systematically associated with countercyclical changes in their country spreads: namely, in bad times, countries borrow less at higher spread and default more frequently. To examine this prominent aspect of emerging countries, I develop a small open economy model of sovereign default in a dynamic stochastic general equilibrium setting. In this mo...

Abstract In this paper, the effect of foreign sector macro-variable on inflation dynamics and firms’ pricing behavior has been investigated in the context of a small open economy New Keynesian Phillips Curve. This curve is derived and estimated for a developing oil-exporting economy suffering from Dutch Disease. This version of NKPC is an extension of Leith and Malley’s (2007) small open econom...

The old idea of segmented macroeconomics of the financial sector competing with the real economy is replaced by a new model, which manifests strong interaction, integration and co-evolution by circular causation relations between the monetary sector and the real economy with the bridging function of finance and financial instruments. The Money, Finance, Spending and Real Economy (MFSRE) model e...