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Investment and Current Account Dynamics in an Open Economy Status Seeking Framework

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  • Fisher, Walter H.

    (Department of Economics and Finance, Institute for Advanced Studies)

Abstract

In this paper we analyze the implications of status-preference, modelled 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 is 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 non-monotonic behavior in transition to the steady-state equilibrium.

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File URL: http://www.ihs.ac.at/publications/eco/es-110.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 110.

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Length: 30 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:ihs:ihsesp:110

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Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

Related research

Keywords: Current account; Status seeking; Relative wealth; Open economy dynamics;

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References

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  1. Rauscher, Michael, 1997. "Protestant Ethic, Status Seeking, and Economic Growth," Thuenen-Series of Applied Economic Theory 09, University of Rostock, Institute of Economics.
  2. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  3. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Discussion Papers in Economics at the University of Washington 90-09, Department of Economics at the University of Washington.
  4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  5. 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.
  6. Turnovsky, S. & Sen, P., 1988. "Deterioration Of The Term Of Trade And Capital Eccumulation A Reexamination Of The Laursen-Metzler Effect," Discussion Papers in Economics at the University of Washington 88-08, Department of Economics at the University of Washington.
  7. 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.
  8. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
  9. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
  10. 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.
  11. 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.
  12. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  13. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119.
  14. Ortigueira, Salvador & Santos, Manuel S, 1997. "On the Speed of Convergence in Endogenous Growth Models," American Economic Review, American Economic Association, vol. 87(3), pages 383-99, June.
  15. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, vol. 54(1), pages 87-92, January.
  16. 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.
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