Productivity Shocks, Stabilization Policies and the Dynamics of Net Foreign Assets

Di Giorgio, Giorgio and Nisticò, Salvatore (2010) Productivity Shocks, Stabilization Policies and the Dynamics of Net Foreign Assets. [Working Paper]. p. 37. Working Document Series (90). (Unpublished)

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In this paper we investigate the role of macroeconomic stabilization policies for the international transmission of productivity shocks and their eects on the external sector. We develop a two-country stochastic Dynamic New-Keynesian "perpetual youth" model of the business cycle with ncomplete international nancial markets. Our OLG structure implies stationary net foreign asset dynamics and allows for a thorough analysis of the interaction of monetary policy with non-balanced budget scal policy. We derive the dynamic and cyclical properties of scal decit feedback rules and their implications for net foreign assets dynamics. Our results imply that the degree of "scal discipline", i.e. the extent to which the scal rule responds to debt dynamics, is crucial for the dynamics of net foreign assets. We show that under a counter-cyclical scal rule with low scal discipline temporary positive productivity shocks may result in substantial deteriorations of the Net Foreign Asset position in the medium run. This result crucially hinges on the interplay among nominal rigidities, non-balanced budget scal policy, and the wealth eects on consumption that are implied by our OLG structure.

Item Type: Report / Paper (Working Paper)
Research documents and activity classification: Working Papers > Non-Refereed Working Papers / of national relevance only
Divisions: Department of Business and Management
Additional Information: A previous version of this paper, substantially revised, was circulated with the title "Fiscal Decits, Current Account Dynamics and Monetary Policy" (LLEE wd n.55, 2007, and MEF wp n. 8, 2008). Usual disclaimers apply.
Uncontrolled Keywords: Fiscal Deficit, Current Account, DSGE Models, Monetary and Fiscal Policy
MIUR Scientific Area: Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited by: Maria Teresa Nisticò
Date Deposited: 09 Dec 2010 10:19
Last Modified: 22 Apr 2015 00:13

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