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The surge in capital flows: analysis of ‘pull’ and ‘push’ factors
Author(s) -
Agénor PierreRichard
Publication year - 1998
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199801)3:1<39::aid-ijfe60>3.0.co;2-x
Subject(s) - economics , net foreign assets , monetary economics , small open economy , shock (circulatory) , exchange rate , consumption (sociology) , short run , open economy , relative price , stock (firearms) , capital (architecture) , macroeconomics , current account , medicine , mechanical engineering , social science , sociology , engineering , archaeology , history
This paper uses an intertemporal optimizing model of a small open economy facing imperfect world capital markets to assess the effects of ‘pull’ and ‘push’ factors on capital flows, asset accumulation, and the real exchange rate. A positive money demand shock raises consumption and holdings of foreign assets and appreciates the real exchange rate in the long run; it has an ambiguous effect on real money balances on impact. A positive productivity shock in the traded goods sector also leads to a long‐run real appreciation (the Balassa‐Samuelson effect), but the impact effect on relative prices is ambiguous. An increase in government spending on home goods leads to a real appreciation in the long run, but it has an ambiguous effect on the economy’s stock of net foreign assets. The dynamic effects associated with a reduction in the world interest rate depend on the degree of intertemporal substitution in consumption and the initial asset position of private agents. © 1998 John Wiley & Sons, Ltd.