No abstract

We model a bubble in a productive asset (capital) on an explosive path, which diverges from the fundamental equilibrium and bursts with a positive probability. When the bubble grows, the small open economy borrows from the the world economy to finance investment and production, and banks charge the risk of the bubble bursting as an interest rate spread to debtors. Consequently, the interest rate spread widens as loans are increasingly backed by the bubble. When the bubble bursts, defaults cause a sudden stop of credit inflow from the world economy, investment falls, and the interest rate spread vanishes.

Economic variability can affect economic agents’ risk perception and behavior, which in turn affects negatively economic activities and prosperity. The government, therefore, tries to raise their confidence by designing proper policies to stabilize the economy. To learn the effects of the policies, several models are utilized, and the Dynamic Stochastic General Equilibrium (DSGE) model is recognized as a potential choice for discovering such effects. Also, this work applies the DSGE model to extend its application and contributes to this research area in terms of model construction technique by learning the policy effects in the Thai context through the closed economy models. In this study, Thailand's quarterly detrended data from 2001:Q1 to 2019:Q2 and the Bayesian estimation method were used. The results showed that the positive effect of technological evolution on economic growth occurred in both economies, but the effect in the two-sector economy was less than what occurred in the one-sector economy. Additionally, it was demonstrated that monetary policy was more effective than fiscal policy. Hence, the recommendations were that policy designers had to design policies to improve technology in all sectors simultaneously, and the fiscal authority had to recognize the effect of the number of related agents on the effectiveness of its policies. Also, the monetary authority had to design a boundary for interest rate volatility to stabilize the economy.