Macroeconomic Interdependence Between a Stagnant and a Fully Employed Country

Abstract

This paper presents a two‐country two‐commodity dynamic model where one country achieves full employment and the other suffers from secular stagnation of aggregate demand. Own and spillover effects of changes in preference, productivity and policy parameters are examined. Parameter changes that improve the stagnant country's current account, such as a reduction in government purchases, a decrease in foreign aid and an improvement in productivity, raise the relative price of the home commodity. Consequently, home employment shrinks, deflation worsens and consumption decreases. The terms of trade for the full‐employment country deteriorate. Thus, income and consumption decrease in both countries.

A simple aggregate demand analysis with dynamic optimization in a small open economy

“…There are open-economy extensions of the dynamic stagnation model, e.g. Ono (2006Ono ( , 2007Ono ( , 2014Ono ( , 2018, Johdo and Hashimoto (2009) and Hashimoto (2011Hashimoto ( , 2015, but they use a two-country setting and have much more complicated frameworks. The present analysis treats a small country case and has a simple structure comparable to the Mundell-Fleming model.…”

Negative Interest Rate Policy in a Permanent Liquidity Trap

“…In this permanent liquidity trap, I investigate the effects of 2 Recently, economists have proposed several types of permanent stagnation. The causes of permanent stagnation advocated by them are deleveraging shocks (Eggertsson and Mehrotra, 2014;Eggertsson et al, 2016), wealth preferences (Michaillat and Saez, 2014;Michau, 2018;Ono and Yamada, 2018), pessimistic expectations (Benigno and Fornaro, 2018), and liquidity preferences (Ono and Ishida, 2014;Illing et al, 2018;Murota, 2018;Ono, 2018).…”

Immigration and Secular Stagnation

“…See, e.g.,Liu (2010), Chassambouilli and Palivos (2014) andBattisti et al (2018), who have used two-sector models.17Ono (2014Ono ( , 2018 have studied policy interdependence between large countries without consideration of immigration issues.…”