Financial Openness versus Autarky in a Neoclassical Growth Model

George Alogoskoufis

No 201407, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: This paper compares financial openness with autarky in a neoclassical growth model, with adjustment costs for investment. We analyse the relation between growth and the current account in the transition towards the balanced growth path, and derive the implications of the two financial regimes for the balanced growth path. For an economy with an initial capital stock which is lower than the rest of the world, output (GDP) per capita on the balanced growth path is the same under financial openness and autarky. However, Gross National Product (GNP) and consumption per capita are lower under financial openness than under autarky. The reason is that the economy has to pay interest on the foreign debt it has accumulated during the transition. During the transition, the economy runs current account deficits and accumulates net foreign debt. The opposite applies to an economy, whose initial capital stock is higher than the rest of the world. There are benefits from financial openness and inter-temporal trade for either type of economy, as, during the transition, the path of the world real interest rate differs from the path of autarky real interest rates for either type of economy.

Keywords: neoclassical growth; external balance; interest rates; financial openness; financial autarky (search for similar items in EconPapers)
JEL-codes: D91 D92 F34 F43 O11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-07
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:aeb:wpaper:201407:y:2014

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