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Increasing Returns, Financial Capital Mobility And Real Exchange Rate Dynamics

Listed author(s):
  • Steven Pennings
  • Rod Tyers

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.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/16_pennings_tyers_2007.pdf
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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.

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Length: 33 pages
Date of creation: Sep 2007
Handle: RePEc:een:camaaa:2007-16
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