Increasing Returns,Financial Capital Mobility and Real Exchange Rate Dynamics* |
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| Authors: | STEVEN PENNINGS ROD TYERS |
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| Institution: | 1. The Australian National University;2. 3. Rod Tyers is professor of economics in the ANU's College of Business and Economics. Steven Pennings is on leave from the Reserve Bank of Australia. The research for this paper was conducted while Steven () was at the ANU and does not necessarily reflect the views of the Reserve Bank. |
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| 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. |
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| Keywords: | F21 F31 F32 F41 F43 |
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