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
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.
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.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 optimization.
Prerequisites
Concepts to review before diving in.
- Intertemporal choice and Euler-equation intuition
- Basic national-income accounting for open economies
Next models to study
Keep moving through the track.
Upper-undergraduate econometrics
Simple OLS Regression
Adjust the data-generating process and watch the fitted line, coefficient estimates, and residual behavior move with noise, slope, and sample size.
Intermediate price theory
Supply and Demand Equilibrium
Track how intercepts and shocks shift equilibrium price, quantity, and total surplus in a competitive market.