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Capital Account Liberalization, Financial Frictions, and Belief-Driven Fluctuations

Author

Listed:
  • Takuma Kunieda

    (School of Economics, Kwansei Gakuin University)

  • Kazuo Nishimura

    (Kobe University and Research Institute of Economy, Trade and Industry)

Abstract

To investigate the macroeconomic effects of capital account liberalization, we apply a dynamic general equilibrium model with two production sectors. In contrast to the literature on belief-driven sunspot fluctuations caused by production externalities, our model does not assume any production externalities. In our model, agents face financial constraints and production heterogeneity. The financial constraints and agents' production heterogeneity are sources of dynamic inefficiency. Although indeterminacy of equilibrium and belief-driven sunspot fluctuations never occur in the closed economy, dynamic inefficiency combined with a negative foreign asset in the steady state produces indeterminacy in the small open economy if financial constraints are fully relaxed under the condition that the investment goods sector is more labor intensive than the consumption goods sector.

Suggested Citation

  • Takuma Kunieda & Kazuo Nishimura, 2023. "Capital Account Liberalization, Financial Frictions, and Belief-Driven Fluctuations," Discussion Paper Series 244, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:244
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    References listed on IDEAS

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    More about this item

    Keywords

    Two-sector growth model; small open economy; fiancial constraints; heterogeneous agents; dynamic inefficiency; indeterminacy.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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