Do Foreign Inflows Let Expectations Dominate History?

Ashima Goyal

MPRA Paper from University Library of Munich, Germany

Abstract: Investment is a function of the present value of expected future output. A change in the regime of foreign inflows can boost these expectations, so that investment propensities exceed savings. Even so, a pricing rule exists that ensures stability and maximizes expected profits. A macro dynamic system results in which there are two classes of equilibria, with high (low) capacity utilization associated with lower (higher) mark-ups. There are unique classes of adjustment paths approaching these equilibria, and medium-run growth cycles occur due to switches between these. Expectations can jump to either equilibrium, causing an endogenous amplification of shocks. In the case of a shock to foreign inflows supportive macroeconomic policies that tie the domestic to the world interest rate are required to achieve the highest feasible growth path.

Keywords: Animal spirits; multiple equilibria; growth cycles; pricing rule; stability (search for similar items in EconPapers)
JEL-codes: E2 E32 F36 O23 (search for similar items in EconPapers)
Date: 1998
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Published in Journal of Foreign Exchange and International Finance 3.12(1998): pp. 189-207

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