Increasing returns, financial capital mobility and real exchange rate dynamics

Vol: 
16/2007
Author name: 
Pennings S
Tyers R
Year: 
2007
Month: 
September
Abstract: 

The late 1990s saw a US IT investment boom, large capital flows into the US and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT-related knowledge spill-over 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.

Publication file: 

Updated:  17 July 2024/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin