collinearity/Bk problem

[jpfeifer]

I don’t think this is uncommon. See e.g.

Uribe & Schmitt-Grohe

You seem to be confusing things here. The basic small open economy model is non-stationary, but it has nothing to do with growth where writing everything in intensive form removes the unit root. Rather, the model features a unit root because not foreign assets are non-stationary. It is basically the permanent income hypothesis at work. If there is a change in foreign bonds, agents will always consume the annuity out of these additional savings, but they will not consume more than that. Hence, bo…