Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy

Wang, Gaowang and Zou, Heng-fu (2011): Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy.

Abstract

This paper develops a simple mercantilism model for a small open economy and examines the real effects of macroeconomic policies. In this setting, the saddle-point stability of the model with wealth effects hinges on an interesting "relative smoothness condition" for foreign asset accumulation. And comparative static analysis shows that an increase of monetary growth rate and a central-bank purchase of foreign exchange have positive real effects on the economy. In contrast, an increase of government expenditure always has negative effects on the economy. Moreover, the stronger of the mercantilist sentiments, the more consumption, real money balance holdings and foreign asset accumulation in the long run. These conclusions are very different from those ridiculous ones of Obstfeld's paper (1981).

• Item Type: MPRA Paper
• Language: English
• Keywords: Mercantilism; Foreign Asset Accumulation; Relative Smoothness Condition
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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