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Current Account Dynamics in a Small Open-Economy Model of Status Seeking

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  • Walter H. Fisher

Abstract

In this paper we analyze the implications of status preference, modeled as relative wealth, for the current account in a small open-economy framework with capital stock dynamics. We demonstrate that the transitional dynamics of the economy are characterized by two distinct speeds of adjustment: a speed of adjustment arising from status preference and a speed of adjustment arising from installation costs of investment. This structure implies that the current account balance depends on both speeds of adjustment as well as on the long-run equilibrium, which is a function of the degree of status consciousness. As a consequence, the current account can exhibit nonmonotonic behavior in transition to the steady-state equilibrium subsequent to a productivity disturbance. Copyright Blackwell Publishing Ltd 2005..

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 13 (2005)
Issue (Month): 2 (05)
Pages: 262-282

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Handle: RePEc:bla:reviec:v:13:y:2005:i:2:p:262-282

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  1. Partha Sen & Stephen J. Turnovsky, 1990. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc.
  2. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
  3. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  4. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  5. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
  6. Sen, Partha & Turnovsky, Stephen J, 1989. "Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 811-31, November.
  7. Rauscher, Michael, 1997. "Protestant Ethic, Status Seeking, and Economic Growth," Thuenen-Series of Applied Economic Theory 09, University of Rostock, Institute of Economics.
  8. Futagami, Koichi & Shibata, Akihisa, 1998. "Keeping one step ahead of the Joneses: Status, the distribution of wealth, and long run growth," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 109-126, July.
  9. Fisher, Walter H. & Hof, Franz X., 2001. "Status Seeking in the Small Open Economy," Economics Series 106, Institute for Advanced Studies.
  10. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, vol. 54(1), pages 87-92, January.
  11. Fisher, Walter H., 2001. "Status Preference, Wealth, and Dynamics in the Open Economy," Economics Series 99, Institute for Advanced Studies.
  12. Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-16, March.
  13. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
  14. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  15. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119, December.
  16. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November.
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Cited by:
  1. Simone Valente, 2007. "International Status Seeking, Trade, and Growth Leadership," CER-ETH Economics working paper series 07/75, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  2. Cardi, Olivier, 2007. "Another View Of The J-Curve," Macroeconomic Dynamics, Cambridge University Press, vol. 11(02), pages 153-174, April.
  3. Ryu-ichiro Murota & Yoshiyasu Ono, 2008. "Growth, Stagnation and Status Preference," ISER Discussion Paper 0715, Institute of Social and Economic Research, Osaka University.
  4. Simone Valente, 2006. "Trade, Envy and Growth: International Status Seeking in a Two-Country World," CER-ETH Economics working paper series 06/53, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  5. Walter H. Fisher, 2004. "Durable Consumption As A Status Good: A Study Of Neoclassical Cases," Computing in Economics and Finance 2004 96, Society for Computational Economics.

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