A simple aggregate demand analysis with dynamic optimization in a small open economy |
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| Institution: | 1. Graduate School of Economics, Kobe University, 2-1 Rokko-dai, Nada, Kobe, 657-8501, Japan;2. Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki, Osaka, 567-0047, Japan;1. Department of Management, Università Politecnica delle Marche, Ancona, Italy;2. Department of Economics and Social Science, Università Politecnica delle Marche, Ancona, Italy;1. Department of Financial Engineering, Ajou University, Suwon, 16499, Republic of Korea;2. Department of Applied Mathematics & Institute of Natural Science, Kyung Hee University, Yongin, 17104, Republic of Korea;3. Department of Mathematical Sciences, Seoul National University, Seoul, 08826, Republic of Korea;1. CREM UMR 6211, Université de Caen Normandie, France;2. ICN Business School-CEREFIGE, Nancy, France;1. University of South Australia, Australia;2. Faculty of Business and Economics, University of Melbourne, Australia;3. University of Mazandaran, Iran;4. Shahid Beheshti University, Iran |
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| Abstract: | We develop a very simple aggregate demand analysis of a small open economy that suffers from secular demand stagnation. It looks like the conventional Keynesian cross analysis but considers dynamically optimizing behavior of households and firms, international capital movement, and the current account adjustment. We find that parameter changes that improve the current account yield an appreciation pressure on the home currency and decrease demand for the home commodity and labor. Consequently, they worsen deflation and decrease consumption and income. This result is quite opposite to that under full employment. For example, an exogenous rise in the price of the home commodity decreases employment, consumption and income. If a country owns greater foreign assets, it suffers from less employment, consumption and income. |
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| Keywords: | Aggregate demand shortage Unemployment Small open economy E12 E13 E21 E24 F32 F41 |
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