Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics

18 Pages Posted: 1 Sep 2008

See all articles by Steven Pennings

Steven Pennings

New York University (NYU)

Rod Tyers

Australian National University (ANU) - School of Economics; The University of Western Australia - Department of Economics

Abstract

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

Suggested Citation

Pennings, Steven and Tyers, Rod, Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics. Economic Record, Vol. 84, Issue s1, pp. S141-S158, September 2008. Available at SSRN: https://ssrn.com/abstract=1260486 or http://dx.doi.org/10.1111/j.1475-4932.2008.00490.x

Steven Pennings (Contact Author)

New York University (NYU) ( email )

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Rod Tyers

Australian National University (ANU) - School of Economics ( email )

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Australia
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The University of Western Australia - Department of Economics ( email )

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Australia
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HOME PAGE: http://www.business.uwa.edu.au/school/staff-profiles?type=profile&dn=cn%3DRodney%20Tyers%2Cou%3DEcon

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