MACROECONOMIC DYNAMICS IN A MULTICOUNTRY ECONOMY - A DYNAMIC OPTIMIZATION APPROACH

Using a multi-country model with perfect-foresight dynamic optimization by infinitely-lived households, we analyze the dynamics of macroeconomic nonmonetary and monetary variables. We show that the most patient country initially accumulates foreign debt, but eventually decumulates this debt, and becomes a creditor. It monotonically increases its consumption, and experiences monotonic price and exchange-rate appreciation. The moderately patient country initially accumulates foreign assets, but eventually decumulates them, and becomes a debtor. Its consumption also follows a humped path. The least patient country monotonically decumulates foreign assets, lowers its consumption, and experiences rising inflation and exchange-rate depreciation.