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International Capital Mobility and Factor Reallocation in a Multisector Economy

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  • Sirin Saracoglu

    ()
    (Department of Economics, METU)

  • Zeynep Akgul

    ()
    (Department of Economics, METU)

Abstract

This paper examines the effects of international capital flows in a small open econ omy utilizing a dynamic general equilibrium framework based on a three-sector Ramsey growth model. In order to analyze the impact of international capital mobility on production, consumption and allocation of resources across three sectors ,two different economic environments are modelled. The first model represents an open economy with capital mobility (a more comprehensive environment),and the second model introduces a closed economy with no capital mobility. Numerical applications of the models use data from the Turkish economy for the year 2002. The numerical results demonstrate that the presence of capital mobility, despite being limited by a borrowing constraint, reverses the impact of economic growth on production and resource allocation. The results also show that while production in the closed economy model simply adjusts to domestic demand, that of the open economy model is not constrained by it. Results further point that although there is positive growth in income and output in both environments, income growth in the capital mobility environment falls short of that in the no capital mobility environment. This result can be attributed to the relatively slower accumulation of capi tal in the former, which may be compensated by a positive rate of technological progress to accompany international capital flows.

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File URL: http://www.erc.metu.edu.tr/menu/series10/1001.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 1001.

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Length: 41 pages
Date of creation: Apr 2010
Date of revision: Apr 2010
Handle: RePEc:met:wpaper:1001

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Keywords: International Capital Flows; Human Capital; Multisector economy; Borrowing Constraint;

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  1. Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice, 1998. "The Global Capital Market: Benefactor or Menace?," Center for International and Development Economics Research, Working Paper Series qt3kn3n2s8, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Michael Klein & Giovanni Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston.
  4. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  5. Arjun Jayadev, 2007. "Capital account openness and the labour share of income," Cambridge Journal of Economics, Oxford University Press, vol. 31(3), pages 423-443, May.
  6. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  7. Frederic Mishkin, 2005. "Is Financial Globalization Beneficial?," NBER Working Papers 11891, National Bureau of Economic Research, Inc.
  8. Levine, Ross, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
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