Working Paper: NBER ID: w2141
Authors: Charles Engel; Kenneth Kletzer
Abstract: We examine a model of a small open economy in which there is free international mobility of financial capital, investment in capital goods and a non-traded good. Such an environment is rich enough to explain several phenomena that are inexplicable in more barren models. We suggest an explanation of why saving and investment may be correlated even with no restrictions on trade in assets. We explain why a high saving country may nonetheless borrow from abroad to finance investment. We also provide an optimizing model of stages in the balance of payments.
Keywords: saving; investment; nontraded goods; open economy
JEL Codes: F21; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Saving (E21) | Investment (G31) |
| Rate of Time Preference (D15) | Borrowing from Abroad (F34) |
| Saving (E21) | Marginal Productivity of Capital (D24) |
| Investment (G31) | Balance of Payments (F30) |
| Saving (E21) | Balance of Payments (F30) |