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How does openness to capital flows affect growth?

  • Jordan Rappaport

An average adjustment cost which is convex with respect to the rate of gross investment success-fully calibrates a neoclassical growth model to match real world observables including the transition paths of convergence speed, the shadow value of capital, interest rates, and savings rates. Comparing the open-economy and closed-economy versions of the calibrated model shows that relaxing the constraint that domestic savings finance domestic investment effects only a small increase in the growth rate of output per capita: less than one percentage point per year for an economy with current output 20 percent its steady-state level and less than one-half percentage point for an economy with current output 60 percent its steady-state level. Rather than higher growth, the main effect of openness to capital flows is higher current levels of consumption financed by large trade deficits.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 00-11.

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Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedkrw:rwp00-11
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