Premium
SIZE, OPENNESS, AND MACROECONOMIC INTERDEPENDENCE
Author(s) -
Chudik Alexander,
Straub Roland
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12208
Subject(s) - economics , openness to experience , rest (music) , open economy , general equilibrium theory , small open economy , economy , macroeconomics , monetary policy , exchange rate , medicine , cardiology , psychology , social psychology
One common, simplifying assumption in open economy macroliterature is that the rest of the world can be thought of as a representative economy. This article formally investigates conditions under which this assumption can be justified using a multicountry general equilibrium model as a laboratory. We derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Thereby, we show that the two‐country framework is a valid approximation only for economies that have diversified trade linkages and only when there is no globally dominant economy among the foreign economies.