Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Interacting Two-Country Business Fluctuations
Author(s): T. Asada, Carl Chiarella, Peter Flaschel & Reiner Franke
Date of publication: May 2003
Working paper number: 128
In this paper we investigate the closed-economy Keynes-Wicksell-Goodwin model of Chiarella and Flaschel (2000) for the case of two interacting open economies. We introduce these coupled two-country KWG dynamics on the extensive form level by means of a subdivision into nine modules describing the behavioral equations, the laws of motion and the identities or budget equations of the model. We then derive their intensive form representation and the 10 laws of motions of the model on the basis of certain simplifying asumptions. Thereafter we present the uniquely determined steady state solution of the dynamics and discuss in a mathematically informal way its stability properties, concerning asymptotic stability and loss of stability by way of super- or subcritical Hopf-bifurcations. In a final section we explore numerically a variety of situations of interacting real and financial cycles, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by means of a kinked money wage Phillips curve, exhibiting downward rigidity of the money-wage, coupled with upward flexibility of the usual type.
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Known citations: Gossé, J., 2009, "The Real and Financial Implications of the Global Saving Glut: A Three-Country Model", Working Paper.