External imbalances and collateral constraints in a two country world preliminary version

External imbalances and collateral constraints in a two-country world (preliminary version) Eleni Iliopulos?, University of Pavia and EPEE, University of Evry September 18, 2008 Abstract In this article, we focus on current account dynamics in large open economies characterized by debt-constrained heterogeneous agents and endogenous monetary policies. We incorporate three key features that have bulked large in the New Open Macroeconomics literature: i) home bias in trade ii) price rigidities and iii) durable goods (real properties). In order to limit agents' willingness to consume and to (partially) insure creditors against the risk of default, we incorporate collateral constraints. We show that the impatience of collateral-constrained agents can be at the roots of permanent external imbalances; indeed our model has a unique and dynamically determinate steady state, which is characterized by a positive level of debt. Our framework allows us to analyze the linkage between exchange rates, real assets and international capital flows. We focus on this mechanism so as to track the (international) transmission of shocks and the implications for the monetary policy; we show how developments affecting the house market can affect current account and exchange rate dynamics. JEL classification codes : E52, F32, F37, F41. Keywords : open economy, durable goods, collateral constraints, sticky prices, simple monetary rules. 1 Introduction During the last decades, the world economy has experienced the emergence of significant external imbalances.

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