Advanced macroeconomics

Small Open Economy Model

An intertemporal borrowing-and-lending model that takes the world interest rate as given and highlights current-account dynamics and consumption smoothing.

Macroeconomics Open economy Advanced EasyEcon / Marimo Growth, business cycles, and open economy
Focus

World interest rates, current account, and smoothing

Explore how productivity shifts, world interest rates, and impatience shape consumption, external borrowing, and the current account over time.

EasyEcon interactive

Small Open Economy notebook

EasyEcon / Marimo

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World interest rates, current account, and smoothing

Explore how productivity shifts, world interest rates, and impatience shape consumption, external borrowing, and the current account over time.

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What to explore

Change parameters and watch the model adjust.

  • World interest rate, discount factor, shock persistence, and income profile parameters
  • Initial net foreign assets and horizon for the transition path

Core ideas

Interpret the mechanics before you chase the graphs.

  • A small open economy can smooth consumption by borrowing in lean periods and lending in strong periods.
  • Current-account movements reflect intertemporal trade, not just contemporaneous trade balances.
  • The world interest rate pins down the external borrowing margin in a way that differs sharply from closed-economy models.

Learning goals

What this model should help students internalize.

  • Interpret consumption smoothing when households can borrow or lend at an exogenous world interest rate.
  • Track how temporary versus persistent shocks affect the current account.
  • Relate net foreign asset dynamics to intertemporal optimisation.

Prerequisites

Concepts to review before diving in.

  • Intertemporal choice and Euler-equation intuition
  • Basic national-income accounting for open economies

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