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Convergence, capital accumulation and the nominal exchange rate

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Author Info
Péter Benczúr () (Magyar Nemzeti Bank)
István Kónya () (Magyar Nemzeti Bank)

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Abstract

This paper develops a flexible price, two-sector nominal growth model, in order to study the role of the exchange rate regime in capital accumulation (convergence). We adopt a standard model of a small open economy with traded and nontraded goods, and enrich its structure with costly investment and a preference for real money holdings. We find that (i) the choice of exchange rate regime influences the transition dynamics of a small open economy, (ii) a one-sector model does not adequately capture the channels through which the nominal side interacts with real variables, and (iii) as a consequence, sectoral asymmetries are important for understanding the effects of the exchange rate regime on capital accumulation.

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Publisher Info
Paper provided by Magyar Nemzeti Bank (The Central Bank of Hungary) in its series MNB Working Papers with number 2007/2.

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Length: 40 pages
Date of creation: 2007
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Handle: RePEc:mnb:wpaper:2007/2

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Related research
Keywords: two-sector growth model; small open economy; capital accumulation; household portfolios; real effects of nominal shocks.;

Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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