Can Capital Mobility Be Destabilizing?

32 Pages Posted: 30 Mar 2000 Last revised: 5 May 2000

See all articles by Qinglai Meng

Qinglai Meng

The Chinese University of Hong Kong (CUHK) - Department of Economics

Andrés Velasco

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: July 1999

Abstract

In a standard two-sector neoclassical model with distortions, capital mobility can render the steady state indeterminate, in the sense that there exist infinitely many convergent paths. In the closed economy with no international capital mobility, the utility function must be linear or close to it for indeterminacy to occur, while in the open economy the shape of the utility function makes no difference. The reason is that in the no mobility case changes in aggregate investment must be matched by changes in aggregate consumption, while in the case of full capital mobility they can simply be financed by borrowing abroad. The paper provides some theoretical underpinnings to the concerns that de-regulating the capital account may be destabilizing.

Suggested Citation

Meng, Qinglai and Velasco, Andrés, Can Capital Mobility Be Destabilizing? (July 1999). NBER Working Paper No. w7263. Available at SSRN: https://ssrn.com/abstract=202369

Qinglai Meng

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Andrés Velasco (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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