Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics

Steven Pennings and Rodney Tyers

The Economic Record, 2008, vol. 84, issue s1, S141-S158

Abstract: The late 1990s saw a US IT investment boom, large capital flows into the USA and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT‐related knowledge spillover externalities and associated productivity and profit growth. Using a two‐region dynamic general equilibrium model with externalities, we find a once‐off productivity shock leads to capital inflow and a real appreciation only in the short term. In the long term, capital flows stabilise and the real exchange rate depreciates. For a single shock to trigger long‐term growth in capital flows requires unrealistically large externalities.

Date: 2008
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https://doi.org/10.1111/j.1475-4932.2008.00490.x

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Working Paper: INCREASING RETURNS, FINANCIAL CAPITAL MOBILITY AND REAL EXCHANGE RATE DYNAMICS (2007)
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