Current Account Dynamics in a Small Open‐Economy Model of Status Seeking*

In this paper we analyze the implications of status preference, modeled as relative wealth, for the current account in a small open‐economy framework with capital stock dynamics. We demonstrate that the transitional dynamics of the economy are characterized by two distinct speeds of adjustment: a speed of adjustment arising from status preference and a speed of adjustment arising from installation costs of investment. This structure implies that the current account balance depends on both speeds of adjustment as well as on the long‐run equilibrium, which is a function of the degree of status consciousness. As a consequence, the current account can exhibit nonmonotonic behavior in transition to the steady‐state equilibrium subsequent to a productivity disturbance.