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Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation

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  • Vladimir Klyuev

    (International Monetary Fund, US)

Abstract

The paper introduces a tractable capital market friction mechanism that allows a break of the parity between the domestic and external interest rates and generates a gradual evolution of capital stock, consumption, relative prices and the interest rate differential- in contrast to the instantaneous convergence found in models with interest rate parity. The friction, derived from the explicit microfoundations, is such that the cost of new loans is an increasing function o net borrowing. The paper also presents a to-sector, open economy model of capital accumulation, where the friction mechanism is combined with standard assumptions about household preferences and production technology, which generates plausible dynamics of macroeconomic variables.

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Bibliographic Info

Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

Volume (Year): 9 (2006)
Issue (Month): 1 (Summer)
Pages: 21-38

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Handle: RePEc:ekn:ekonom:v:9:y:2006:i:1:p:21-38

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Web page: http://www.ekonomia.ucy.ac.cy/
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  1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  2. Jaewoo Lee & Man-Keung Tang, 2003. "Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?," IMF Working Papers 03/154, International Monetary Fund.
  3. Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June.
  4. Barro, Robert J & Mankiw, N Gregory & Sala-i-Martin, Xavier, 1995. "Capital Mobility in Neoclassical Models of Growth," American Economic Review, American Economic Association, vol. 85(1), pages 103-15, March.
  5. Philip L. Brock & Stephen J. Turnovsky, 1993. "The Dependent Economy Model with Both Traded and Non-Traded Capital Goods," NBER Working Papers 4500, National Bureau of Economic Research, Inc.
  6. Leslie Lipschitz & Alex Mourmouras & Timothy D. Lane, 2002. "Capital Flows to Transition Economies," IMF Working Papers 02/11, International Monetary Fund.
  7. Neary, J Peter & Purvis, Douglas D, 1982. " Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 229-53.
  8. Murphy, Robert G., 1986. "Productivity shocks, non-traded goods and optimal capital accumulation," European Economic Review, Elsevier, vol. 30(5), pages 1081-1095, October.
  9. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
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