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Capital Accumulation, Asset Price Dynamics and the Macroeconomy

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  • Moumita Basu
  • Ranjanendra Narayan Nag

Abstract

This article develops a dependent economy model of determination of employment and asset prices that integrates the roles of relative prices, expectations and dynamics of capital accumulation. In this model, money wage is rigid which leads to persistence of unemployment. Labour and capital are used as factors of production in the traded sector while the non-traded sector uses labour and imported intermediate inputs. The article examines macroeconomic implications of selective economic reforms for asset price dynamics, growth and employment. The discussion of comparative static exercises shows that not only the effects of different policies are ambiguous but also the short-run and the long-run effects are qualitatively different. For example, tariff liberalization causes the short-run expansions of both traded and non-traded sectors but overtime it may depress the capital stock leading to contraction of both the sectors and an increase in unemployment. The broad message of this article is that the design of macroeconomic policy should not be purely based on considerations of the short-run effects of policy changes. JEL: E22, F13, F41

Suggested Citation

  • Moumita Basu & Ranjanendra Narayan Nag, 2018. "Capital Accumulation, Asset Price Dynamics and the Macroeconomy," Foreign Trade Review, , vol. 53(3), pages 127-155, August.
    • Handle: RePEc:sae:fortra:v:53:y:2018:i:3:p:127-155
    DOI: 10.1177/0015732517734753
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    References listed on IDEAS

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    1. Olivier Cardi & Romain Restout, 2011. "Fiscal shocks in a two sector open economy," Working Papers hal-00567855, HAL.
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    3. Turnovsky Stephen J. & Sen Partha, 1995. "Investment in a Two-Sector Dependent Economy," Journal of the Japanese and International Economies, Elsevier, vol. 9(1), pages 29-55, March.
    4. Turnovsky,Stephen J., 2011. "Capital Accumulation and Economic Growth in a Small Open Economy," Cambridge Books, Cambridge University Press, number 9780521187527.
    5. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
    6. Buffie, Edward F, 1986. "Input Price Shocks in the Small Open Economy," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 551-565, November.
    7. Daniel Farhat, 2010. "Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms," Working Papers 1002, University of Otago, Department of Economics, revised May 2010.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Tobin’s q; dependent economy; capital accumulation; employment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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