On the background of what we have learned from the Solow model for a small open...

On the background of what we have learned from the Solow model for a small open economy, discuss arguments for and against liberalizing capital flows. Is your overall conclusion based on the theory (and empirics) we have surveyed in favor of or against such liberalization?

(International Macroeconomic)

Expert Solution

We are considering an open economy,where capital is fullymobile. Labor,however,isnot.All markets are competitive. Two new basicrelationsships: 1.Savings6=Domestictotalinvestment 2.ProductionandIncomearenotlongeridentical
Thenationalaccountsidentityis Y=C+I+NX⇐⇒Y+rF=C+I+NX+rF whereNXrepresentsnetexports,andFisholdningsofforeigncapital; rF=incomeinﬂowfromforeigncapitalholdnings.
THEBASICMODEL

Startingwitheq(1):
Vt+1=St+Vt
eq(2) =s·(Yt+rwFt)+Vt
eq(3) =s·(wLt+rwKt+rwFt)+Vt
defofVandeq(4) =s·¯wLt+(1+srw)Vt Asaﬁnalstep:Lt+1=(1+n)Lt,n>−1.Letvt≡Vt/Lt.Then vt+1= s¯ w 1+n + 1+srw 1+n vt≡Φ(vt) isthefundamentallawofmotionforwealthintheopeneconomysetting.

EMPIRICS:LONG-RUNGROWTH ObservethatGNIpercapita yn t=¯ y+rft=¯ w+rwvt Wecanthereforeconvertthelawofmotionforv,intooneforyn 1 r¡yn t+1−¯ w¢=s¯ w 1+n + 1+sr 1+nµ1 r (yn t−¯ w)¶ ⇓ yn t+1= n 1+n ¯ w+ 1+sr 1+n yn t⇒(yn)∗=n n−sr ¯ w. AsintheclosedeconomySolowmodel:Growthinincomepercapita willcometoahalt(provided1+sr 1+n<1). Youwillstillseegrowthintransitionhowever.Note,GDPpercapita, y(aswellasw,randk),isconstantatallpointsintime.Changes requirehumancapitalaccumulation,or,technologicalchange.

Rahul Sunny answered 2 years ago

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