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

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Author Info
Fisher, Walter H. (Department of Economics and Finance, Institute for Advanced Studies)

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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
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File Function: First version, 2002
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Publisher 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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Related research
Keywords: Current account; Status seeking; Relative wealth; Open economy dynamics;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
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