Growth Dynamics of Neoclassical Open Economies
This thesis examines how well neoclassical open economy growth models can replicate the qualitative features of the time paths of an emerging economy during its development stages. In particular we look at the trends in saving and investment rates and the current account balance, which have motivated previous research, as well as trends in import and export shares of GDP and the terms of trade, which pertain to an open economy.We build three open economy models - one with portfolio adjustment cost, one with endogenous discounting and one with 2 sectors. We first look at their stochastic impulse responses. Then we perform the standard exercise of transitional dynamics with no exogenous changes. Finally, we enrich our study by motivating and implementing exogenous changes in technology and foreign demand over a "catch-up" stage, and study the perfect foresight dynamics. With each dynamic experiment, we examine the associated trends, and discuss the intuitions. Each model has its strengths and weaknesses, and each computational trial produces mixed results that match real life observations with varying degrees of success. We compare the results and discuss the implications of each modelling technique.
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