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Increasing Returns, Financial Capital Mobility And Real Exchange Rate Dynamics

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  • Steven Pennings
  • Rod Tyers

Abstract

The late 1990s saw a US IT investment boom, large capital flows into the US and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT-related knowledge spill-over 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.

Suggested Citation

  • Steven Pennings & Rod Tyers, 2007. "Increasing Returns, Financial Capital Mobility And Real Exchange Rate Dynamics," CAMA Working Papers 2007-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2007-16
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    Cited by:

    1. Arora, Vipin & Tyers, Rod, 2012. "Asset arbitrage and the price of oil," Economic Modelling, Elsevier, vol. 29(2), pages 142-150.
    2. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANU Working Papers in Economics and Econometrics 2008-491, Australian National University, College of Business and Economics, School of Economics.

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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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