Extrapolative Expectations and Capital Flows during Convergence

Guido Cozzi and Margaret Davenport

MPRA Paper from University Library of Munich, Germany

Abstract: How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income.

Keywords: capital flows; extrapolative expectations; global imbalances; technological convergence (search for similar items in EconPapers)
JEL-codes: E03 F21 F41 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/78016/1/MPRA_paper_78016.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/79517/9/MPRA_paper_79517.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/79968/17/MPRA_paper_79968.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/82742/17/MPRA_paper_79968.pdf revised version (application/pdf)

Related works:
Journal Article: Extrapolative expectations and capital flows during convergence (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:78016

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().