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Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation

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  • Vladimir Klyuev

Abstract

This paper introduces a tractable capital market friction mechanism that allows a break of the parity between domestic and external interest rates and generates a gradual evolution of capital stock and other macroeconomic variables-in contrast to the instantaneous convergence found in models with interest rate parity. The friction, derived from explicit microfoundations, is such that the cost of new loans is an increasing function of net borrowing. The paper also presents a two-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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/31.

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Length: 19
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/31

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Keywords: Capital inflows; Capital accumulation; Real effective exchange rates; Economic models; capital mobility; capital market; open economy; capital stock; capital goods; capital intensity; capital flows; foreign capital; real appreciation; closed economy; unit of capital; access to capital markets; open economies; capital equipment; capital markets; political economy; external financing; tradable goods; adjustment process; external indebtedness; transition economies; net capital; exchange rate movements; capital account opening; return on capital; trading partner; transition path; perfect substitutes; partial equilibrium; investment goods;

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  1. 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.
  2. 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.
  3. Brock, Philip L & Turnovsky, Stephen J, 1994. "The Dependent-Economy Model with Both Traded and Nontraded Capital Goods," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 306-25, October.
  4. 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.
  5. Barro, R. & Mankiw, G., 1992. "Capital Mobility in Neoclassical Models of Growth," Harvard Institute of Economic Research Working Papers 1615, Harvard - Institute of Economic Research.
  6. Murphy, Robert G., 1986. "Productivity shocks, non-traded goods and optimal capital accumulation," European Economic Review, Elsevier, vol. 30(5), pages 1081-1095, October.
  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Leslie Lipschitz & Alex Mourmouras & Timothy D. Lane, 2002. "Capital Flows to Transition Economies," IMF Working Papers 02/11, International Monetary Fund.
  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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