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How does openness to capital flows affect growth?

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  • Jordan Rappaport

Abstract

An average adjustment cost which is convex with respect to the rate of gross investment success-fully calibrates a neoclassical growth model to match real world observables including the transition paths of convergence speed, the shadow value of capital, interest rates, and savings rates. Comparing the open-economy and closed-economy versions of the calibrated model shows that relaxing the constraint that domestic savings finance domestic investment effects only a small increase in the growth rate of output per capita: less than one percentage point per year for an economy with current output 20 percent its steady-state level and less than one-half percentage point for an economy with current output 60 percent its steady-state level. Rather than higher growth, the main effect of openness to capital flows is higher current levels of consumption financed by large trade deficits.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 00-11.

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Date of creation: 2000
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Handle: RePEc:fip:fedkrw:rwp00-11

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Citations

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Cited by:
  1. Jordan M. Rappaport, 2000. "How Does Labor Mobility Affect Income Convergence?," Econometric Society World Congress 2000 Contributed Papers 0124, Econometric Society.
  2. Jaime Martínez-Martín, 2011. "General equilibrium long-run determinants for Spanish FDI: a spatial panel data approach," SERIEs, Spanish Economic Association, vol. 2(3), pages 305-333, September.
  3. Jordan Rappaport, 1999. "Why are population flows so persistent?," Research Working Paper 99-13, Federal Reserve Bank of Kansas City.
  4. Yaojun Yao, 2011. "International trade and technological progress in china: Evidence from time series," Frontiers of Economics in China, Springer, vol. 6(3), pages 464-478, September.
  5. Axel Dreher, 2002. "Does Globalization Affect Growth?," Development and Comp Systems 0210004, EconWPA, revised 04 Feb 2003.
  6. Roghieh Gholami & Sang-Yong Tom Lee & Almas Heshmati, 2006. "The Causal Relationship Between Information and Communication Technology and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 29(1), pages 43-62, 01.
  7. Alessandra dal Colle Stievano, 2004. "Finance-Growth Nexus in open economies with outliers," Money Macro and Finance (MMF) Research Group Conference 2004 4, Money Macro and Finance Research Group.
  8. Jordan Rappaport, 2000. "Is the speed of convergence constant?," Research Working Paper RWP 00-10, Federal Reserve Bank of Kansas City.
  9. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
  10. Mustapha Sadni Jallab & Monnet Benoît Patrick Gbakou & René Sandretto, 2008. "Foreign Direct Investment, Macroeconomic Instability And Economic Growth in MENA Countries," Working Papers 0817, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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