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Capital goods imports, the real exchange rate and the current account

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  • Serven, Luis

Abstract

Conventional aggregate models of open economies typically rule out trade in capital goods. But capital goods account for a major share of the world trade. In 1990, they represented more than 40 percent of U.S. merchandise exports and more than 30 percent of its imports. In the same year, capital goods imports represented an average of roughly 30 of total imports for 82 industrial and developing countries, and almost 9 percent of their GDP. This report shows that the presence of imported capital goods greatly changes the short- and long-run effects of macoreconomic policies and external shocks on key macroeconomic variables. Using a rational-expectations aggregate model with intertemporally optimizing agents and with trade in both consumption and capital goods, it finds that the long-run equilibrium of the economy displays a negative relationship between the real exchange rate and real output - that is, a real appreciation is associated with an increase in long-run output and the capital stock. With investment subject to adjustment costs, the response to unanticipated permanent disturbances involves a changing real exchange rate and a non-zero current account. The author analyzes the macroeconomic consequences of changes infiscal policy and of transfers of wealth from abroad. He show that both have well-defined long-run effects on the capital stock and real output. Fiscal expansion, in particular, may have a long-run crowding-in effect on investment. By constrast, the impact of disturbances on the current account is ambiguous. The author shows that it depends critically on the degree of intertemporal substitutability in both consumption and investment - with the latter measured by the magnitude of investment adjustment costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 39 (1995)
Issue (Month): 1-2 (August)
Pages: 79-101

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Handle: RePEc:eee:inecon:v:39:y:1995:i:1-2:p:79-101

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Gavin, Michael, 1992. "Monetary policy, exchange rates, and investment in a Keynesian economy," Journal of International Money and Finance, Elsevier, vol. 11(2), pages 145-161, April.
  2. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  3. Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 235-253, May.
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  11. van Wincoop, Eric, 1993. "Structural adjustment and the construction sector," European Economic Review, Elsevier, vol. 37(1), pages 177-201, January.
  12. Robert G. Murphy, 1989. "Stock Prices, Real Exchange Rates, and Optimal Capital Accumulation," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 102-129, March.
  13. Maurice Obstfeld, 1988. "Fiscal Deficits and Relative Prices in a Growing World Economy," NBER Working Papers 2725, National Bureau of Economic Research, Inc.
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