Productivity and Preferences in a Small Open Economy.

Following Hall (1997) it is increasingly common to incorporate preference, as well as productivity, perturbations in calibrated general equilibrium models. We assess the performance of a small open economy stochastic growth model (based on the Blanchard-Yaari framework) under alternative driving processes. Whilst both models provide familiar descriptions of the aggregate economy, we find that the model driven by productivity disturbances has clear advantages in explaining the behaviour towards foreign asset accumulation. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester