Foreign Investment, Growth and External Adjustment
This paper identifies foreign investment, broadly defined, as an additional source of income growth for open trading economies under conditions where physical capital is free to cross country borders. By extending the precepts of neoclassical theory, it shows how current account imbalances accompany real capital movements which arise to eliminate divergences between rates of return on foreign capital and its international rental cost. It also models the transitional dynamics of the international capital account of an open economy in response to shifts in foreign interest rates and changes in the domestic tax regime. The paper concludes that, in light of the theory, external account imbalances should not necessarily concern policymakers to the extent that they reflect real output enhancing capital flows.
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Volume (Year): 51 (1998)
Issue (Month): 2 ()
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