European Financial and Accounting Journal 2017, 12(1):19-34 | DOI: 10.18267/j.efaj.175

A Simple Open Economy Model: A Non-Linear Dynamic Approach

Jan Kodera, Van Quang TRAN

The objective of this article is to derive a simple dynamic macroeconomic model of an open economy to show how an economy as a dynamic system can work. The proposed model is resulted from the traditional Mundell-Fleming model. Unlike the Mundell-Fleming model, we introduce a continuous dynamic and non-linearity. Non-linearity in our model is represented by a non-linear investment function. The non-linear investment function is introduced as the propensity to invest function, which is assumed to be captured by the logistic function of production. After that, the stability of the model is analysed using Hurwitz stability theorem. The behaviour of our non-linear macroeconomic model of open economy is demonstrated on two numerical examples in which two different sets of parameters are selected to examine the dynamic of the system with emphasis on the impact of export multiplier. The presented examples show that the model is able to generate very complex dynamic.

Keywords: Uncovered interest rate parity, Money market dynamics, Limit cycle, Exchange rate dynamics, Dynamic model
JEL classification: E44

Published: March 1, 2017  Show citation

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Kodera, J., & TRAN, V.Q. (2017). A Simple Open Economy Model: A Non-Linear Dynamic Approach. European Financial and Accounting Journal, 12(1), 19-34. doi: 10.18267/j.efaj.175
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