IDEAS home Printed from https://ideas.repec.org/p/zbw/kondp2/132.html
   My bibliography  Save this paper

Expectations and adjustment dynamics in a two-sector model of a small open economy

Author

Listed:
  • Albert, Max
  • Meckl, Jürgen

Abstract

This paper generalizes the analysis in Albert (1989) and Meckl (1990) of adjustment in a dynamic specific-factors model with endogenous capital stocks. Capital reallocation and accumulation are consequences of investment decisions and depreciation. The Investment process is analyzed under a spectrum of expectations which include rational, adaptive, and static expectations as special cases. Only with rational expectations the speed of adjustment is optimal; adjustment is too fast if expectations are biased towards the status quo, and too slow if expectations are biased towards long-run values. Local and global analysis of the adjustment path show sharp qualitative differences. Non-monotonic adjustment of capital stocks and the social product is possible and is not necessarily the result of expectational errors.

Suggested Citation

  • Albert, Max & Meckl, Jürgen, 1991. "Expectations and adjustment dynamics in a two-sector model of a small open economy," Discussion Papers, Series II 132, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:132
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/101492/1/756478634.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-791, October.
    2. Murphy, Robert G., 1988. "Sector-specific capital and real exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 12(1), pages 7-12, March.
    3. Abel, Andrew B & Blanchard, Olivier J, 1983. "An Intertemporal Model of Saving and Investment," Econometrica, Econometric Society, vol. 51(3), pages 675-692, May.
    4. Meckl, Jürgen, 1990. "Dynamic adjustment in open economies," Discussion Papers, Series II 121, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    5. J. Peter Neary & Douglas D. Purvis, 1983. "Real Adjustment and Exchange Rate Dynamics," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 285-316, National Bureau of Economic Research, Inc.
    6. 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.
    7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    8. Albert, Max, 1989. "Capital mobility and costs of adjustment," Discussion Papers, Series II 96, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    9. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
    10. Winters,L. Alan & Venables,Anthony (ed.), 1991. "European Integration," Cambridge Books, Cambridge University Press, number 9780521405287, October.
    11. Robert G. Murphy, 1990. "The Terms of Trade, Investment, and the Current Account," Boston College Working Papers in Economics 202, Boston College Department of Economics.
    12. Kiminori Matsuyama, 1988. "Terms-of-Trade, Factor Intensities and the Current Account in a Life-Cycle Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 247-262.
    13. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Albert, Max, 1995. "Expectations and adjustment dynamics in the specific-factors model: Correction and extension," Discussion Papers, Series II 246, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hwan-Chyang Lin & Hui-Kuan Tseng, 1993. "Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model," Open Economies Review, Springer, vol. 4(2), pages 133-150, June.
    2. 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.
    3. van Wincoop, Eric, 1995. "A note on short-term intersectoral factor immobility," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 845-856, May.
    4. Hung‐Ju Chen & Chen‐Min Hsu, 2009. "Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs," Southern Economic Journal, John Wiley & Sons, vol. 75(4), pages 1191-1211, April.
    5. Narayan, Seema & Narayan, Paresh Kumar & Tobing, Lutzardo, 2021. "Has tourism influenced Indonesia’s current account?," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 225-237.
    6. Huang, Kevin X.D. & Meng, Qinglai, 2007. "The Harberger-Laursen-Metzler effect under capital market imperfections," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 1001-1015, October.
    7. Philip L. Brock, 2009. "Collateral Constraints and Macroeconomic Adjustment in an Open Economy," Working Papers UWEC-2009-03, University of Washington, Department of Economics.
    8. Alan V. DEARDORFF, 2016. "What Do We (and Others) Mean by “The Terms of Trade”?," Turkish Economic Review, KSP Journals, vol. 3(2), pages 281-291, June.
    9. Erling Steigum & Øystein Thøgersen, 2003. "Borrow and Adjust: Fiscal Policy and Sectoral Adjustment in an Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 699-724, May.
    10. Turnovsky, Stephen J., 1993. "The impact of terms of trade shocks on a small open economy: A stochastic analysis," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 278-297, June.
    11. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    12. Turnovsky, Stephen J., 1991. "Tariffs and sectoral adjustments in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 53-89.
    13. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August.
    14. Albert, Max, 1995. "Expectations and adjustment dynamics in the specific-factors model: Correction and extension," Discussion Papers, Series II 246, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    15. Baldwin, Richard E, 1992. "Measurable Dynamic Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 162-174, February.
    16. O Okiti, 2003. "Temporary and Permanent Terms of Trade Shocks: A Literature Survey," Economics Discussion Paper Series 0334, Economics, The University of Manchester.
    17. Chang, Wen-ya & Lai, Ching-chong, 1997. "Election outcomes and the stockmarket: Further results," European Journal of Political Economy, Elsevier, vol. 13(1), pages 143-155, February.
    18. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    19. repec:fth:nystbu:92-6 is not listed on IDEAS
    20. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    21. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:kondp2:132. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/fwkonde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.