THE DYNAMICS OF A SMALL OPEN-ECONOMY IN RESPONSE TO MONETARY, FISCAL, AND PRODUCTIVITY SHOCKS

This paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility. The variance-covariance matrix of these shocks is estimated. A stochastic model is used to perform numerical simulations. The results show that persistent shocks to productivity can reproduce several empirical regularities (including the puzzling high correlation between national saving and investment) remarkably well and that monetary and fiscal shocks play a minor role.