Good morning everyone,
Is the closed economy hypothesis too strong for a EU country? I’m performing deterministic simulations on a basic dynamic general equilibrium model. I would like to perform such simulations without caring about exchange rates and other “open economy” stuff 
Thank you in advance
That depends on the country and the model, but usually, I would say yes, that assumption is too strong. Germany as the biggest economy still has net exports of about 8% of GDP. But if you do deterministic simulations where the external block stays the same, it is not clear that adding an open economy dimension will significantly affect the model dynamics.
I have a dynamic (deterministic) general equilibrium model for France. I’m assessing some politics impacts in the long run.
What do you mean by the external block?
Thank you.
Is it possible to have simply Imports and Exports as exogenous variables in the resource constraint with the exchange rate ? Such that,
Y = C + G + I + (erP)(X - M)
er being the exchange rate and P the exogenous price of foreign goods. The price of the generic good being 1.
Thank you
The external block is about (er *P)* (X - M). Do you want to vary any of this in your model? Smets/Wouters (2007) in their stochastic model lump G+ (er *P)* (X - M) into an exogenous absorption term. But they need it to account for empirical movements in the data. In your case, you seem to be keeping this part fixed.
I will indeed keep this part fixed. Can I just put in the resource constraint (X-M) without considering an exchange rate?
In addition, do I need to integrate two types of bonds: domestic and foreign bonds since I’m “opening” my economy ?
Best
As I said, that all depends on your goals. If capital mobility is not part of the story, leave it out. The same for the goods trade and the exchange rate. You as the model builder need to take a stance.