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Convergence, capital accumulation and the nominal exchange rate

  • Péter Benczúr


    (Magyar Nemzeti Bank)

  • István Kónya


    (Magyar Nemzeti Bank)

This paper develops a flexible price, two-sector nominal growth model, in order to study the role of the exchange rate regime in capital accumulation (convergence). We adopt a standard model of a small open economy with traded and nontraded goods, and enrich its structure with costly investment and a preference for real money holdings. We find that (i) the choice of exchange rate regime influences the transition dynamics of a small open economy, (ii) a one-sector model does not adequately capture the channels through which the nominal side interacts with real variables, and (iii) as a consequence, sectoral asymmetries are important for understanding the effects of the exchange rate regime on capital accumulation.

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Paper provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its series MNB Working Papers with number 2007/2.

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Length: 40 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mnb:wpaper:2007/2
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