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Do Foreign Inflows Let Expectations Dominate History?

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  • Goyal, Ashima

Abstract

Investment is a function of the present value of expected future output. A change in the regime of foreign inflows can boost these expectations, so that investment propensities exceed savings. Even so, a pricing rule exists that ensures stability and maximizes expected profits. A macro dynamic system results in which there are two classes of equilibria, with high (low) capacity utilization associated with lower (higher) mark-ups. There are unique classes of adjustment paths approaching these equilibria, and medium-run growth cycles occur due to switches between these. Expectations can jump to either equilibrium, causing an endogenous amplification of shocks. In the case of a shock to foreign inflows supportive macroeconomic policies that tie the domestic to the world interest rate are required to achieve the highest feasible growth path.

Suggested Citation

  • Goyal, Ashima, 1998. "Do Foreign Inflows Let Expectations Dominate History?," MPRA Paper 76790, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:76790
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    File URL: https://mpra.ub.uni-muenchen.de/76790/1/MPRA_paper_76790.pdf
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    References listed on IDEAS

    as
    1. Goyal, A., 1992. "The Role of Foreign Aid and the foreign exchange Constraint in Growth : Some Extensions," Papers 70, Indira Gandhi Institute of Development Research-.
    2. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    3. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
    4. Motahar, Eshragh, 1992. "Endogenous capital utilization and the q theory of investment," Economics Letters, Elsevier, vol. 40(1), pages 71-75, September.
    5. Peter Flaschel, 1994. "A Harrodian Knife-Edge Theorem For The Wage-Price Sector," Metroeconomica, Wiley Blackwell, vol. 45(3), pages 266-278, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Animal spirits; multiple equilibria; growth cycles; pricing rule; stability;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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