Capital goods imports, the real exchange rate, and the current account
Conventional aggregate models of open economies typically rule out trade in capital goods. But capital goods account for a major share of the world trade. In 1990, they represented more than 40 percent of U.S. merchandise exports and more than 30 percent of its imports. In the same year, capital goods imports represented an average of roughly 30 of total imports for 82 industrial and developing countries, and almost 9 percent of their GDP. This report shows that the presence of imported capital goods greatly changes the short- and long-run effects of macoreconomic policies and external shocks on key macroeconomic variables. Using a rational-expectations aggregate model with intertemporally optimizing agents and with trade in both consumption and capital goods, it finds that the long-run equilibrium of the economy displays a negative relationship between the real exchange rate and real output - that is, a real appreciation is associated with an increase in long-run output and the capital stock. With investment subject to adjustment costs, the response to unanticipated permanent disturbances involves a changing real exchange rate and a non-zero current account. The author analyzes the macroeconomic consequences of changes infiscal policy and of transfers of wealth from abroad. He show that both have well-defined long-run effects on the capital stock and real output. Fiscal expansion, in particular, may have a long-run crowding-in effect on investment. By constrast, the impact of disturbances on the current account is ambiguous. The author shows that it depends critically on the degree of intertemporal substitutability in both consumption and investment - with the latter measured by the magnitude of investment adjustment costs.
|Date of creation:||31 May 1994|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 235-253, May.
- Giovannini, Alberto, 1988. "The real exchange rate, the capital stock, and fiscal policy," European Economic Review, Elsevier, vol. 32(9), pages 1747-1767, November.
- Robert G. Murphy, 1989. "Stock Prices, Real Exchange Rates, and Optimal Capital Accumulation," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 102-129, March.
- 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.
- Partha Sen & Stephen J. Turnovsky, 1988. "Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy," NBER Working Papers 2781, National Bureau of Economic Research, Inc.
- Maurice Obstfeld, 1988.
"Fiscal Deficits and Relative Prices in a Growing World Economy,"
NBER Working Papers
2725, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
- Hayashi, Fumio & Inoue, Tohru, 1991.
"The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms,"
Econometric Society, vol. 59(3), pages 731-53, May.
- Fumio Hayashi & Tohru Inoue, 1990. "The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," NBER Working Papers 3326, National Bureau of Economic Research, Inc.
- Turnovsky, S.J. & Sen, P., 1990.
"Fiscal Policy, Capital Accumulation, And Debt In An Open Economy,"
90-18, University of Washington, Department of Economics.
- Turnovsky, Stephen J & Sen, Partha, 1991. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 43(1), pages 1-24, January.
- Stephen J. Turnovsky & Partha Sen, 1990. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," NBER Working Papers 3489, National Bureau of Economic Research, Inc.
- Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Discussion Papers in Economics at the University of Washington 90-18, Department of Economics at the University of Washington.
- Borensztein, Eduardo R., 1989. "Fiscal policy and foreign debt," Journal of International Economics, Elsevier, vol. 26(1-2), pages 53-75, February.
- Brock, Philip L & Turnovsky, Stephen J, 1994.
"The Dependent-Economy Model with Both Traded and Nontraded Capital Goods,"
Review of International Economics,
Wiley Blackwell, vol. 2(3), pages 306-25, October.
- Philip L. Brock & Stephen J. Turnovsky, 1993. "The Dependent Economy Model with Both Traded and Non-Traded Capital Goods," NBER Working Papers 4500, National Bureau of Economic Research, Inc.
- Warner, Andrew M., 1994. "Mexico's investment collapse: debt or oil?," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 239-256, April.
- Gavin, Michael, 1992. "Monetary policy, exchange rates, and investment in a Keynesian economy," Journal of International Money and Finance, Elsevier, vol. 11(2), pages 145-161, April.
- Rudiger Dornbusch, 1981.
"Real Interest Rates, Home Goods, and Optimal External Borrowing,"
NBER Working Papers
0779, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
- Gavin, Michael, 1991. "Income effects of adjustment to a terms of trade disturbance and the demand for adjustment finance," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 127-153, November.
- Buiter, Willem H., 1984.
"Fiscal Policy in Open, Interdependent Economies,"
CEPR Discussion Papers
28, C.E.P.R. Discussion Papers.
- van Wincoop, Eric, 1993. "Structural adjustment and the construction sector," European Economic Review, Elsevier, vol. 37(1), pages 177-201, January.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1298. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.