Working Paper: NBER ID: w7263
Authors: Qinglai Meng; Andrés Velasco
Abstract: In a standard two-sector neoclassical model with distortions, capital mobility can render the steady state indeterminate, in the sense that there exist infinitely many convergent paths. In the closed economy with no international capital mobility, the utility function must be linear or close to it for indeterminacy to occur, while in the open economy the shape of the utility function makes no difference. The reason is that in the no mobility case changes in aggregate investment must be matched by changes in aggregate consumption, while in the case of full capital mobility they can simply be financed by borrowing abroad. The paper provides some theoretical underpinnings to the concerns that de-regulating the capital account may be destabilizing.
Keywords: No keywords provided
JEL Codes: F3; F4; E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital mobility (F20) | indeterminacy (D89) |
| capital mobility (F20) | indeterminacy in economic equilibria (D59) |
| indeterminacy in investment and savings decisions (E22) | influenced by asset prices and returns (G19) |
| curvature of the utility function does not affect investment decisions in an open economy (D11) | indeterminacy possible regardless of curvature (D89) |
| presence of externalities or market distortions (D62) | facilitates indeterminacy (D89) |
| capital mobility introduces a mechanism (F20) | sudden and potentially large movements in capital and current accounts (F32) |