Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities

This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two‐country, two‐period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endogenous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account. For the second case, we examine how an increase in current account deficit affects foreign investments. The complementarity or substitutability of foreign capital and domestic capital turns out to be crucial to the relationship between current account deficit and foreign investment.     

Tax policy on foreign direct investment in the presence of cross-hauling

Tax Policy on Foreign Direct Investment in the Presence of Cross-Hauling. — The authors develop a partial equilibrium model of foreign direct investment (FDI) in which identical foreign firms locate themselves in a host country to compete with internationally mobile domestic firms in non-tradeable oligopolistic markets for two differentiated commodities. The host country, which is small in the market for FDI, uses lumpsum subsidy (tax) to encourage (discourage) FDI. There is unemployment in the host country. Under this framework, the authors analyse the effect of discriminatory and uniform subsidies on the inflow/outflow of domestic and foreign firms and on employment. They also derive some properties of optimal subsidies.     

Accounting for development through investment prices

Cross-country income gaps are large in the data. Can observed investment prices account for these gaps? Our model adds an extensive margin to the neoclassical growth model by allowing for entry of firms. When combined with a “returns to variety” effect, our model provides an amplification mechanism from investment prices to output. Using cross-country data on relative investment prices, the model can explain up to 5 to 6-fold income differences between the richest and poorest countries in our sample while simultaneously reducing the implied cross-country TFP differences.     

Cross‐border Lobbying in Preferential Trading Agreements: Implications for External Tariffs and Welfare

This paper examines the effect of cross‐border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two‐stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent‐seeking activities type. We find that cross‐border lobbying un‐ambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.     

Growth and equilibrium indeterminacy: the role of capital mobility

Summary. The paper presents a human capital driven endogenous growth model which, in general, permits a multiplicity of equilibrium balanced growth paths. It is shown that allowing for perfect capital mobility across countries increases the range of parameter values for which the model permits equilibrium indeterminacy. As opposed to the closed capital markets case, simple restrictions on preferences are no longer sufficient to eliminate the indeterminacy. Intuitively, under perfect capital mobility agents are able to smooth consumption completely. This induces an economy with open capital markets to behave like a closed economy with linear preferences thereby increasing the possibility of equilibrium indeterminacy. Received: 18 November 1998; revised version: 10 August 1999