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Capital goods imports, the real exchange rate, and the current account, Volume 1
 
Author:Serven, Luis; Date Stored:2001/04/19
Document Date:1994/05/31Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; International Terrorism & Counterterrorism; Economic Theory & Research; Macroeconomic Management; Free TradeLanguage:English
Major Sector:(Historic)Economic PolicyReport Number:WPS1298
Sub Sectors:TradeCollection Title:Policy, Research working paper ; no. WPS 1298
Volume No:1  

Summary: Conventional aggregate models of open economies typically rule out trade in capital goods. But capital goods account for a major share of the world trade. In 1990, they represented more than 40 percent of U.S. merchandise exports and more than 30 percent of its imports. In the same year, capital goods imports represented an average of roughly 30 of total imports for 82 industrial and developing countries, and almost 9 percent of their GDP. This report shows that the presence of imported capital goods greatly changes the short- and long-run effects of macoreconomic policies and external shocks on key macroeconomic variables. Using a rational-expectations aggregate model with intertemporally optimizing agents and with trade in both consumption and capital goods, it finds that the long-run equilibrium of the economy displays a negative relationship between the real exchange rate and real output - that is, a real appreciation is associated with an increase in long-run output and the capital stock. With investment subject to adjustment costs, the response to unanticipated permanent disturbances involves a changing real exchange rate and a non-zero current account. The author analyzes the macroeconomic consequences of changes in fiscal policy and of transfers of wealth from abroad. He show that both have well-defined long-run effects on the capital stock and real output. Fiscal expansion, in particular, may have a long-run crowding-in effect on investment. By constrast, the impact of disturbances on the current account is ambiguous. The author shows that it depends critically on the degree of intertemporal substitutability in both consumption and investment - with the latter measured by the magnitude of investment adjustment costs.

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