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Department of Economics
Spring Semester 2023-2024
Module Code and Title of Module: ECN6620, International Money and Finance
Submission deadline: Monday, 20th of May 2024, by 12 noon.
International Money and Finance: Coursework
Consider a deterministic dynamic general equilibrium model for a small open economy populated by a large number N of identical individuals, each having the same preferences, receiving the same endowment of income in every period, and starting with the same level of asset holdings. Time starts in t=0 and the economy terminates in t=2. The preferences of the representative individual are described by the intertemporal utility function Uo = ∑t(2)=o β tu(ct), with β = 1⁄(1 + p). In every period the representative individual faces the budget constraint ct + (1 + rt)dt 一1 = yt + dt . The initial debt holdings is given by d一1 = 0. All variables and parameters have standard interpretation.
Question 1
Let rt = p = r for t=0,1,2. Consider two different endowment allocations. The first is yt = y when t = 0,2 and yt = λ1y when t = 1 . The second is yt = y when t = 0,2 and yt = λ2y
when t = 1. Let y > 0, λ1 > 1 and 0 < λ2 < 1.
Derive the intertemporal equilibrium allocation of consumption, debt, trade balance and current account and give an economic interpretation to your results.
Summarize your results by filling in your answer sheet the following table:
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Endowment: |
yo = y, y1 = λ1y, y2 = y |
yo = y, y1 = λ2y, y2 = y |
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Pres. Value Income: |
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Consumption in t=0: |
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Consumption in t=1: |
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Consumption in t=2: |
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Assets in t=0: |
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Assets in t=1: |
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Trade balance in t=0: |
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Trade balance in t= 1: |
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Trade balance in t=2: |
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Current account in t=0: |
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Current account in t= 1: |
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Current account in t=2: |
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[max 700 words]
Question 2
Assume that following a global financial crisis, the foreign sector stops lending only in period t = 0. Describe how to model analytically this sanction, derive the effects of the crisis on consumption, debt, trade balance and current account and provide economic interpretation for both endowment allocations in Question 1. [max 650 words]
Question 3
Assume that as a result of an international conflict the foreign sector precludes access to the financial market to the domestic economy only in period t = 0. Describe how to model analytically this sanction, derive how it affects consumption, debt, trade balance and current account and provide economic interpretation for both endowment allocations in Question 1. Compare your results with those in question 2. [max 650 words]