Equilibrium Indeterminacy in a Small Open Economy with Traded and Non-traded Capital

Jongkyou Jeon ()
Additional contact information
Jongkyou Jeon: Kyung Hee University

East Asian Economic Review, 2007, vol. 11, issue 2, 143-186

Abstract: This paper presents the necessary conditions for equilibrium indeterminacy in a small open economy under partial capital mobility. In order to have meaningful transitional dynamics of consumption and capital, I assume that the economy uses two kinds of capital as inputs － traded capital and non-traded capital － and households can borrow from foreigners only with traded capital as collateral. Non-traded capital must be accumulated out of domestic savings, even with the free access to the world capital market. Benabib and Farmer (1994) argue that a representative agent model such as the standard RBC model requires a high degree of increasing returns to scale to cause indeterminacy in equilibrium path. Unlike the closed economy model of Benabib and Farmer (1994), equilibrium indeterminacy is shown to arise with a much weaker degree of increasing returns to scale in an open economy environment. This result implies that opening the capital market makes the small economy more vulnerable to the 'animal spirits' of investors. The fact that only the net returns to traded capital equal the world interest rate at all points in time plays an important role in determining the results.

Keywords: Partial Capital Mobility; Equilibrium Indeterminacy; Business Fluctuations (search for similar items in EconPapers)
JEL-codes: F32 F43 (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.11644/KIEP.JEAI.2007.11.2.173 Full text (application/pdf)

Related works:
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:ris:eaerev:0147

Access Statistics for this article

East Asian Economic Review is currently edited by JE Lee

More articles in East Asian Economic Review from Korea Institute for International Economic Policy [30147] 3rd Floor Building C Sejong National Research Complex 370 Sicheong-daero Sejong-si, Korea. Contact information at EDIRC.
Bibliographic data for series maintained by JE Lee ().