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Investment and Current Account Dynamics in an Open Economy Status Seeking Framework

Walter Fisher

No 110, Economics Series from Institute for Advanced Studies

Abstract: In this paper we analyze the implications of status-preference, modelled as relative wealth, for the current account in a small open economy framework with capital stock dynamics. We demonstrate that the transitional dynamics of the economy is characterized by two distinct speeds of adjustment: a speed of adjustment arising from status-preference and a speed of adjustment arising from installation costs of investment. This structure implies that the current account balance depends on both speeds of adjustment as well as on the long-run equilibrium, which is a function of the degree of status-consciousness. As a consequence, the current account can exhibit non-monotonic behavior in transition to the steady-state equilibrium.

Keywords: Current account; Status seeking; Relative wealth; Open economy dynamics (search for similar items in EconPapers)
JEL-codes: E21 F41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2002-02
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