The small open economy model with incomplete asset markets features a steady state that depends on initial conditions. In addition, equilibrium dynamics posses a random walk component. A number of modifications to the standard model have been proposed to induce stationarity. This paper presents...

This paper quantifies the costs of adhering to a fixed-exchange-rate arrangement, such as a currency union, for emerging economies. To this end it develops a novel dynamic stochastic disequilibrium model of a small open economy with monetary nonneutrality due to downward nominal wage rigidity....

This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the...