Dynamic general-equilibrium model of an open economy: A comment

The model developed by Devarajan and Go [Devarajan S., & Go S. (1998). The simplest dynamic general-equilibrium model of an open economy. Journal of Policy Modeling, 20(6), 677–714] presents the simplest possible general-equilibrium model of an open economy in which producers’ and consumers’ decisions are both intra-and inter-temporally consistent. Unfortunately, there is possible leakage in that imported capital goods are taxed twice, yet these taxes do not show up fully in the government's budget constraint. Additionally, one of the proposed terminal conditions is implied by the other equations because of Walras’ Law. Therefore, the model description is lacking an appropriate terminal condition. In this paper an alternative set of equations is presented that removes the possible leakage and has an additional terminal condition with respect to one of the stock variables.