IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Increasing Returns, Financial Capital Mobility And Real Exchange Rate Dynamics

  • Steven Pennings

    ()

  • Rod Tyers

    ()

The 1990s appreciation of the US$ has been blamed on the 'irrational exuberance' of investors in the US IT boom. A core of these investors appeared to believe that technology-related productivity growth (due, in part, to knowledge spill-over externalities) would raise the relative US rate of return over a sustained period. This paper introduces a two country, dynamic general equilibrium model with international financial capital mobility and trade to investigate the conditions under which a single technology shock could cause such a sustained change in capital flows. We find that a once-off productivity shock, whether in the presence of (small-medium) externalities or not, leads to capital inflow and a real appreciation in the short term but is followed in the long term by a stabilisation of the capital account and a net depreciation of the real exchange rate. For a single shock to trigger long-term growth in relative capital returns appears to require unrealistically large externalities. The presence of adaptive expectations can lead to persistence and cyclical behaviour in the real exchange rate and current account.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2007/Pennings_Tyers_162007.pdf
Download Restriction: no

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-16.

as
in new window

Length: 33 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-16
Contact details of provider: Postal:
Crawford Building, Lennox Crossing, Building #132, Canberra ACT 2601

Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.au
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Robert J. Gordon, 2000. "Does the "New Economy" Measure Up to the Great Inventions of the Past?," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 49-74, Fall.
  2. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  4. Jaffe, A.B. & Trajtenberg, M., 1992. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," Papers 14-92, Tel Aviv.
  5. Bergin, Paul R & Glick, Reuven & Taylor, Alan M., 2004. "Productivity, Tradability and the Long-Run Price Puzzle," CEPR Discussion Papers 4494, C.E.P.R. Discussion Papers.
  6. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Discussion Papers in Economics at the University of Washington 0038, Department of Economics at the University of Washington.
  7. Rod Tyers, 2005. "Trade Reform and Manufacturing Pricing Behavior in Four Archetype Asia-Pacific Economies ," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 181-203, 06.
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. MartinNeil Baily & Robert Z. Lawrence, 2001. "Do We Have a New E-conomy?," American Economic Review, American Economic Association, vol. 91(2), pages 308-312, May.
  10. Ghironi, Fabio & Melitz, Marc, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Scholarly Articles 3228377, Harvard University Department of Economics.
  11. Baldwin, Richard E., 1999. "Agglomeration and endogenous capital," European Economic Review, Elsevier, vol. 43(2), pages 253-280, February.
  12. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  13. W. Jill Harrison & K.R. Pearson, 1994. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Centre of Policy Studies/IMPACT Centre Working Papers ip-64, Victoria University, Centre of Policy Studies/IMPACT Centre.
  14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  15. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers 227, Carnegie Mellon University, Tepper School of Business.
  16. Tyers, Rod & Golley, Jane, 2008. "China’s Real Exchange Rate Puzzle," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 547-574.
  17. Rod Tyers & Jane Golley & Bu Yongxiang & Ian Bain, 2006. "China's Economic Growth and its Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2006-476, Australian National University, College of Business and Economics, School of Economics.
  18. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
  19. Stacey Tevlin & Karl Whelan, 2000. "Explaining the investment boom of the 1990s," Finance and Economics Discussion Series 2000-11, Board of Governors of the Federal Reserve System (U.S.).
  20. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  21. Laura Bottazzi & Giovanni Peri, . "Innovation and Spillovers in Regions: Evidence from European Patent Data," Working Papers 215, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  22. Rich Lyons & Martin Evans, 2004. "A New Micro Model of Exchange Rate Dynamics," Econometric Society 2004 North American Winter Meetings 622, Econometric Society.
  23. Martin Neil Baily, 2002. "Distinguished Lecture on Economics in Government: The New Economy: Post Mortem or Second Wind?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 3-22, Spring.
  24. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  25. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  26. Michael B. Devereux, 1997. "Real Exchange Rates and Macroeconomics: Evidence and Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 773-808, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2007-16. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cama Admin)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.