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Current Account Dynamics in a Small Open Economy Model of Status Seeking

  • Fisher, Walter H.

    (Department of Economics and Finance, Institute for Advanced Studies)

In this paper we will use a status-preference framework, together with a standard cost of adjustment investment function, to study the dynamics of the small open economy current account balance. We demonstrate that the transitional dynamics of the economy is characterized by two speeds of adjustment: a speed of adjustment arising from status-preference and a speed of adjustment arising from installation costs of investment. This structure implies that the current account balance depends on both speeds of adjustment as well as on the long-run equilibrium. As a consequence, the current account can exhibit non-monotonic behavior in transition to the steady state.

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File URL: http://www.ihs.ac.at/publications/eco/es-107.pdf
File Function: First version, 2001
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 107.

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Length: 25 pages
Date of creation: Oct 2001
Date of revision:
Handle: RePEc:ihs:ihsesp:107
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  1. Fisher, Walter H. & Hof, Franz X., 2005. "Status seeking in the small open economy," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 209-232, June.
  2. Sen, Partha & Turnovsky, Stephen J, 1989. "Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 811-31, November.
  3. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
  4. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  5. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  6. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  7. Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-16, March.
  8. Rauscher, Michael, 1997. "Protestant Ethic, Status Seeking, and Economic Growth," Thuenen-Series of Applied Economic Theory 09, University of Rostock, Institute of Economics.
  9. Futagami, Koichi & Shibata, Akihisa, 1998. "Keeping one step ahead of the Joneses: Status, the distribution of wealth, and long run growth," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 109-126, July.
  10. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Discussion Papers in Economics at the University of Washington 90-09, Department of Economics at the University of Washington.
  11. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
  12. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, vol. 54(1), pages 87-92, January.
  13. Fisher, Walter H., 2001. "Status Preference, Wealth, and Dynamics in the Open Economy," Economics Series 99, Institute for Advanced Studies.
  14. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
  15. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119, June.
  16. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November.
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