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Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics *
Author(s) -
PENNINGS STEVEN,
TYERS ROD
Publication year - 2008
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2008.00490.x
Subject(s) - economics , externality , capital outflow , shock (circulatory) , spillover effect , monetary economics , capital deepening , exchange rate , capital (architecture) , capital accumulation , productivity , physical capital , investment (military) , capital formation , financial capital , profit (economics) , macroeconomics , microeconomics , market economy , human capital , medicine , history , archaeology , politics , political science , law
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.