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Asset Price And Current Account Dynamics

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  • Kim Kyung-Soo
  • Lee Jaewoo

Abstract

We examine the interaction between asset market and current account in a small open economy. In an overlapping generations economy in which land and money are available assets, the interaction between the land price and current account dynamics is shown to generate a plausible (asset price) specie-flow mechanism. We apply them to a number of issues. Domestic credit policy is neutral in the long run: one unit of foreign reserve increase offsets one unit of credit reduction. Next, the association between the endowment of land and foreign asset accumulation depends on parameters of the model. Finally, we examine the dynamic adjustment s following a once-and-for-all capital inflow. When the adjustment involves running current account deficit, the recipient country's foreign reserve position is permanently lowered. Furthermore, the steady state level of national wealth is permanently reduced. [E4, F3]

Suggested Citation

  • Kim Kyung-Soo & Lee Jaewoo, 2001. "Asset Price And Current Account Dynamics," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 85-108.
  • Handle: RePEc:taf:intecj:v:15:y:2001:i:3:p:85-108 DOI: 10.1080/10168730100000045
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
    2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    3. Cesarano, Filippo, 1998. "Hume's specie-flow mechanism and classical monetary theory: An alternative interpretation," Journal of International Economics, Elsevier, pages 173-186.
    4. Sachs, Jeffrey & Boone, Peter, 1988. "Japanese structural adjustment and the balance of payments," Journal of the Japanese and International Economies, Elsevier, vol. 2(3), pages 286-327, September.
    5. Robert Brandon Kahn & Adam Bennett & MarĂ­a Vicenta Carkovic S. & Susan M Schadler, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
    6. Matsuyama, Kiminori, 1990. "Residential investment and the current account," Journal of International Economics, Elsevier, pages 137-153.
    7. Murray C. Kemp, 1970. "The Balance of Payments and the Terms of Trade in Relation to Financial Controls," Review of Economic Studies, Oxford University Press, vol. 37(1), pages 25-31.
    8. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 325-338.
    9. Jeffrey Sachs & Peter Boone, 1988. "Japanese Structural Adjustment and the Balance of Payments," NBER Working Papers 2614, National Bureau of Economic Research, Inc.
    10. Dornbusch, Rudiger & Giovannini, Alberto, 1990. "Monetary policy in the open economy," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 23, pages 1231-1303 Elsevier.
    11. F. H. Hahn, 1959. "The Balance of Payments in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 26(2), pages 110-125.
    12. Reinhart, Carmen & Leiderman, Leonardo, 1994. "Capital inflows to Latin America," MPRA Paper 13406, University Library of Munich, Germany.
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    Cited by:

    1. Charles Ka Yui Leung & Nan-Kuang Chen, 2006. "Intrinsic Cycles of Land Price: A Simple Model," Journal of Real Estate Research, American Real Estate Society, pages 293-320.
    2. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.

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