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Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics


The late 1990s saw a US IT investment boom, large capital flows into the USA and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT-related knowledge spillover externalities and associated productivity and profit growth. Using a two-region dynamic general equilibrium model with externalities, we find a once-off productivity shock leads to capital inflow and a real appreciation only in the short term. In the long term, capital flows stabilise and the real exchange rate depreciates. For a single shock to trigger long-term growth in capital flows requires unrealistically large externalities. Copyright © 2008 The Economic Society of Australia.

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Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 84 (2008)
Issue (Month): s1 (09)
Pages: S141-S158

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Handle: RePEc:bla:ecorec:v:84:y:2008:i:s1:p:s141-s158
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