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Investment and Current Account Dynamics in an Open Economy Status Seeking Framework

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  • Fisher, Walter H.

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

Abstract

In this paper we analyze the implications of status-preference, modelled as relative wealth, for the current account in a small open economy framework with capital stock dynamics. We demonstrate that the transitional dynamics of the economy is characterized by two distinct 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, which is a function of the degree of status-consciousness. As a consequence, the current account can exhibit non-monotonic behavior in transition to the steady-state equilibrium.

Suggested Citation

  • Fisher, Walter H., 2002. "Investment and Current Account Dynamics in an Open Economy Status Seeking Framework," Economics Series 110, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:110
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-110.pdf
    File Function: First version, 2002
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Current account; Status seeking; Relative wealth; Open economy dynamics;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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