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George Alogoskoufis, International Macroeconomics
EconomicGrowthandtheCurrentAccount
AutarkyvsOpennessina
NeoclassicalGrowthModel
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George Alogoskoufis, International Macroeconomics
FinancialAutarkyvsOpenness
• Duringthe1950sandthe1960sthedomesEcfinancialsystemsofmostcountriesweresubjecttocapitalaccountrestricEons.
• CapitalaccountrestricEonsweregraduallyliKedandinthelastfortyyearsglobalfinancialtradinghasgrownexponenEally,leadingtoaneweraoffinancialglobalisaEon.
• Thislecturecomparesfinancialopennesswithautarkyinanextendedneoclassicalgrowthmodel,withadjustmentcostsforinvestment.
• WecanthuscompareboththeevoluEonofsavingsandinvestmentinthetransiEontowardsthebalancedgrowthpaths,andthebalancedgrowthpathsthemselves,underthetwoalternaEveregimes.
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George Alogoskoufis, International Macroeconomics
ConclusionsfromtheLiterature
• “Despiteperiodiccrises,globalfinancialintegraEonholdssignificantbenefitsandprobablyis,inanycase,impossibletostop—shortofasecondgreatdepressionorthirdworldwar.ThechallengefornaEonalandinternaEonalpolicymakersistomaintainaneconomicandpoliEcalmilieuinwhichthetrendofincreasingeconomicintegraEoncanconEnue.”ObsUeld(1998).
• “ThereisliYleevidencethateconomicgrowthandcapitalaccountopennessareposiEvelycorrelatedacrosscountries.Butthereislotsofevidencethatopeningthecapitalaccountleadscountriestotemporarilyinvestmoreandgrowfasterthantheydidwhentheircapitalaccountswereclosed.”Henry(2007).
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George Alogoskoufis, International Macroeconomics
OpennessintheNeoclassicalGrowthModel
• Intheclosedeconomyneoclassicalgrowthmodelitishabituallyassumedthatsavingsdeterminetheinvestmentrate.ThisisausefulsimplifyingassumpEonformostpurposes,butnotforstudyingopeneconomies.
• Inanopeneconomy,thecurrentaccountisdeterminedbythedifferencebetweensavingsandinvestment.Inordertomodelthedynamicsofthecurrentaccountinanon-trivialfashion,oneneedsaninvestmentfuncEonwhichisindependentofthesavingsfuncEon.
• Inthislecture,weuseaneoclassicalgrowthmodelofacompeEEveeconomy,augmentedbytheqtheoryofinvestment.ConsumerschooseindividuallyopEmalconsumpEonplans,andfirmschooseindividuallyopEmalinvestment(andemployment)plans,underthetwoalternaEveregimesoffinancialautarkyandopenness.
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George Alogoskoufis, International Macroeconomics
APreviewoftheConclusions
• Theanalysisoftheextendedneoclassicalmodelofasmalleconomyindicatesthatonthebalancedgrowthpathbothcapitalandoutput(GDP)percapitaarethesameunderfinancialautarkyandopenness.
• However,therearesignificantdifferencesunderthetwoalternaEveregimesduringtheadjustmentpathtothesteadystate.Thesedifferencesarisebecauseofthedynamicsofsavings,investmentandthecurrentaccountandtheaccumulaEonofnetforeignassetsunderfinancialopenness.
• ThedynamicsofthecurrentaccountunderfinancialopennessdependontheiniEalcapitalstock.Thus,theiniEalcapitalstockhasimplicaEonsforsteadystateconsumpEonandtherelaEonshipbetweengrossdomesEcproduct(GDP)andgrossnaEonalincome(GNI)percapitaalongthebalancedgrowthpath.
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George Alogoskoufis, International Macroeconomics
An“Emerging”EconomyunderFinancialAutarkyandOpenness
• Wefirstconsideran“emerging”smalleconomy,whoseiniEalcapitalstockisbelowitssteadystateequilibrium,undertheassumpEonthattherestoftheworldisonabalancedgrowthpath.
• Forsuchaneconomy,therealinterestrateunderfinancialopennesswillbeatitssteadystatevalue,andbelowthecorrespondingpathofrealinterestratesunderautarky.Asaresult,underfinancialopenness,therewillbefullconsumpEonsmoothingandbothpercapitaconsumpEonandinvestmentwillbehigherduringtheadjustmentprocessthanunderautarky.
• DuringthetransiEontothebalancedgrowthpath,underfinancialopenness,theeconomyrunscurrentaccountdeficits(assavingsarelowerandinvestmentishigher)andaccumulatesforeigndebt.Asitapproachesthebalancedgrowthpath,theprocessofforeigndebtaccumulaEonslowsdown,andtheeconomyconvergestoaposiEonofexternalbalance.Onthebalancedgrowthpath,output(GDP)percapitaisthesameasunderautarky,butnaEonalincome(GNP)andconsumpEonpercapitaarelowerthanunderautarky,asdomesEcresidentshavetopayinterestontheforeigndebttheyhaveaccumulatedduringthetransiEon.
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George Alogoskoufis, International Macroeconomics
FinancialOpennessandtheWelfareImplicaEonsofInter-temporalTrade• Therearebenefitsfromfinancialopennessandinter-temporaltradeforthiseconomy,as,duringthetransiEonpath,thepathoftheworldrealinterestratediffersfromthepathofautarkyrealinterestrates.
• Underfinancialopenness,an“emerging”economycanengageinbeneficialaddiEonalinter-temporaltrade,tradingoffhigherconsumpEonintheshortrun,forlowerconsumpEoninthelongrun.ThisiswelfareimprovingasthisopEonisnotavailableunderautarky.
• Foraslongastheautarkyrealinterestratediffersfromtheworldrealinterestrate,thesewelfarebenefitsexist.
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George Alogoskoufis, International Macroeconomics
A“Developed”SmallEconomyunderFinancialAutarkyandOpenness
• ForaneconomywithaniniEalcapitalstockthatexceedsthesteadystatecapitalstock(a“developed”economy),theoppositewouldapply.
• UnderfinancialopennessitwilliniEallyexperiencetradeandcurrentaccountsurpluses,andinthesteadystateitwillendupwithposiEvenetforeignassetsratherthanforeigndebt.
• ConsumpEonpereffecEveunitoflaborwillbehigherthanunderautarkyinthesteadystate,becausethecountryreceivesinterestpaymentsontheforeignassetsithasaccumulated.
• AlthoughsteadystateGDPpercapitaisthesameunderfinancialautarkyandopenness,GNPpercapitaishigherthanGDPpercapitaunderopenness,asthecountryreceivesinterestontheassetsithasaccumulatedvis-a-vistherestoftheworld.
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George Alogoskoufis, International Macroeconomics
InterdependentEconomies• Wealsoconsidertheprocessofadjustmentinatwocountryworld,inwhichtwootherwisesimilareconomieshavedifferentiniEalcapitalstocks.
• Oneeconomyisassumed“emerging”,inthatithasarelaEvelyloweriniEalcapitalstock,andtheotherisassumed“developed”,inthatithasarelaEvelyhigheriniEalcapitalstock.
• Ifthetwoeconomiesestablishinter-temporaltrade,theworldrealinterestratewillbedeterminedbetweentheiniEalautarkyrealinterestratesinthetwoeconomies.
• Inthe“emerging”economyrealinterestrateswillfallcomparedtoautarky,causinganincreaseininvestmentandafallinsavings,andthusacurrentaccountdeficit.Inthe“developed”economyrealinterestrateswillrise,causingafallininvestmentandariseinsavings,andacorrespondingcurrentaccountsurplus.
• Inthesteadystate,botheconomieswillconvergetothesameGDPpercapitawithexternalbalance,butthe“emerging”economywillbeanetdebtorvis-a-vistherestoftheworld,i.evis-a-visthe“developed”economy,whichwillbeanetinternaEonalcreditor.SteadystateGNPpercapitaandsteadystateconsumpEonwillbelowerinthe“emerging”economycomparedtothe“developed”economy,whichasanetinternaEonalcreditorreceivesincomefromitsposiEvenetassetholdings.
• Althoughbotheconomiesderivebenefitsfromfinancialopenness,financialopennesscannotneutralisetheeconomicheadstartoftheiniEally“developed”economy.
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George Alogoskoufis, International Macroeconomics
ARepresentaEveHouseholdModelofaGrowingEconomy
WeassumeaneconomypopulatedbyinfinitelylivedidenEcalhouseholds.Eachhouseholdhasagrowingnumberofmembers,eachofwhichsuppliesoneunitoflabor.
HouseholdjchooseschoosesaconsumpEonpathtomaximise,
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Uj = e−(ρ−n)tt=0
∞
∫ lncj (t)dt
subjecttotheinstantaneousbudgetconstraint,
a•
j (t) = (r(t)− n)aj (t)+wj (t)− cj (t)
andthehousehold’ssolvency(no-Ponzigame)condiEon,
limt→∞
e− (r(s )−n)dss=0
t
∫aj (t) = 0
George Alogoskoufis, International Macroeconomics
TheInter-temporalBudgetConstraintoftheRepresentaEveHouseholdandtheEuler
EquaEonforConsumpEon
ThemaximizaEonproblemoftherepresentaEvehouseholdyieldsthefollowingfirstordercondiEonsforhouseholdandaggregateconsumpEon
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c•
j (s) = (r(s)− ρ)cj (s)
C•(t) = r(t)− ρ + n( )C(t)
IntegraEngtheassetaccumulaEonequaEonoftherepresentaEvehousehold,andusingthesolvencycondiEon,undertheassumpEonthattheiniEalpercapitanon-humanwealthofthehouseholdisequaltoaj(0),yieldsthefamiliarinter-temporalbudgetconstraint,thatthepresentvalueofpercapitaconsumpEonmustequalthepresentvalueofpercapitalaborincomeplustheiniEalpercapitanon-humanwealth.
aj (0)+ wj (t)e− (r(s )−n)dss=0
t
∫dt =
t=0
∞
∫ cj (t)e− (r(s )−n)dss=0
t
∫dt
t=0
∞
∫
George Alogoskoufis, International Macroeconomics
ProducEon,Employment,InvestmentandInstantaneousProfitsofFirms
ProducersarecompeEEvefirms,employingcapitalandlabortoproduceahomogeneouscommodity.TheproducEonfuncEonoffirmiatEmetisassumedCobbDouglaswithconstantreturnstoscale,andisgivenby,
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Yi (t) = AKi (t)α h(t)Li (t)( )1−α
Theefficiencyoflaborgrowsatanexogenousrateg,whichmeasurestherateoftechnicalprocess.Wethusassumethat,
h(t) = egt
InordertodeterminetheproducEon,employmentandinvestmentdecisionsoffirmswefirstdefinetheinstantaneousprofitfuncEonoffirmi.Thisisgivenby,
Yi (t)−w(t)Li (t)− 1+ φ2
Ii (t)Ki (t)
⎛⎝⎜
⎞⎠⎟
⎡
⎣⎢
⎤
⎦⎥ Ii (t)
George Alogoskoufis, International Macroeconomics
TheOpEmizaEonProblemofFirms
Eachfirmchoosesanemploymentandaninvestmentplantomaximise,
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e− r(z )dz
z=t
s
∫ Yi (s)−w(s)Li (s)− 1+ φ2
Ii (s)Ki (s)
⎛⎝⎜
⎞⎠⎟
⎡
⎣⎢
⎤
⎦⎥ Ii (s)
⎛
⎝⎜⎞
⎠⎟s=t
∞
∫ ds
subjecttoitsproducEonfuncEonandthecapitalaccumulaEonequaEon,
K•
i (s) = Ii (s)−δKi (s)
SincefirmsarecompeEEve,theytakethepathofrealwagesandrealinterestratesasexogenouslygiven.
George Alogoskoufis, International Macroeconomics
OpEmalEmploymentandInvestment
FromthefirstordercondiEonsforthemaximisaEonsubjecttotheproducEonfuncEonandthecapitalaccumulaEonequaEon,weget,
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w(t) = (1−α )A Ki (t)Li (t)
⎛⎝⎜
⎞⎠⎟
α
h(t)1−α
qi (t) = 1+φIi (t)Ki (t)
⎛⎝⎜
⎞⎠⎟= 1+φ Ki
•(t)
Ki (t)+δ
⎛
⎝⎜⎜
⎞
⎠⎟⎟
r(t)+δ − qi•(t)
qi (t)
⎛
⎝⎜⎜
⎞
⎠⎟⎟qi (t) =αA
Ki (t)Li (t)
⎛⎝⎜
⎞⎠⎟
α−1
h(t)1−α + φ2
Ki
•(t)
Ki (t)+δ
⎛
⎝⎜⎜
⎞
⎠⎟⎟
2
lims→∞
e− r(z )dzz=t
s
∫qj (s)K j (s) = 0
George Alogoskoufis, International Macroeconomics
InterpretaEonofFirstOrderCondiEons
ThesefirstordercondiEonshavewellknowninterpretaEons:
• ThefirststatesthatfirmswillhirelaborunElthemarginalproductoflaborisequaltotherealwage.
• ThesecondisthecondiEonlinkingtheshadowpriceofinstalledcapitaltothegrossinvestmentrate.
• Thethirdstatesthattheusercostofcapital(ontheleKhandside)isequaltothemarginalproductcapital,whichconsistsofthemarginalproductofcapitalincurrentproducEon,plusthereducEonoffutureinvestmentcosts.
• ThefinalcondiEonisthetransversalitycondiEonthatthepresentvalueofthefuturecapitalstock,asEmegoestoinfinity,tendstozero.
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George Alogoskoufis, International Macroeconomics
AggregateFirstOrderCondiEonsforEmploymentandInvestment
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w(t) = (1−α )Ak(t)α egt
q(t) = 1+φ k•(t)k(t)
+ g + n +δ⎛
⎝⎜⎜
⎞
⎠⎟⎟
r(t)+δ − q•(t)q(t)
⎛
⎝⎜⎜
⎞
⎠⎟⎟q(t) =αAk(t)−(1−α ) + φ
2k•(t)k(t)
+ g + n +δ⎛
⎝⎜⎜
⎞
⎠⎟⎟
2
where, k(t) =K(t)
h(t)L(t)= K(t)e g+n( )t
George Alogoskoufis, International Macroeconomics
TheAdjustmentPathandtheSteadyStateunderFinancialAutarky
• Wedefineasfinancialautarky,theregimeunderwhichtheeconomycannotborroworlendinternaEonally.
• Underfinancialautarky,equilibriuminthegoodsmarketrequiresthatdomesEcconsumpEonplusinvestmentareconEnuouslyequaltototaldomesEcoutput.
• Thus,financialautarkyisaregimeinwhichtheeconomybehavesasaclosedeconomy,anddomesEcinvestmentisalwaysequaltodomesEcsavings.
• TheproperEesofthemodelunderfinancialautarkyarewellknownfromthestandardRamsey-Cass-Koopmansmodelwithadjustmentcostsforinvestment(seeAbelandBlanchard1983).
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George Alogoskoufis, International Macroeconomics
TheModel:FinancialAutarky
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George Alogoskoufis, International Macroeconomics
SteadyStateunderFinancialAutarky
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George Alogoskoufis, International Macroeconomics
Fig.1DynamicAdjustmentunderFinancialAutarky
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George Alogoskoufis, International Macroeconomics
Fig.2TheTimePathsofOutputandConsumpEonunderFinancialAutarky
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George Alogoskoufis, International Macroeconomics
TheModel:FinancialOpenness
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George Alogoskoufis, International Macroeconomics
SteadyStateunderFinancialOpeness
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George Alogoskoufis, International Macroeconomics
Fig.3DynamicAdjustmentofInvestmentandtheCapitalStockunderFinancialOpeness
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George Alogoskoufis, International Macroeconomics
Fig.4TheTimePathsofOutput,ConsumpEonandtheTradeBalanceunderFinancialOpenness,inaSmallOpenEconomy
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George Alogoskoufis, International Macroeconomics
TheTwoCountryModel
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George Alogoskoufis, International Macroeconomics
Fig.5DynamicAdjustmentofInvestmentandtheCapitalStockinaTwoCountryWorld
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George Alogoskoufis, International Macroeconomics
Fig.6TheTimePathsOutput,ConsumpEonandTradeBalancesinaTwoCountryWorld
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George Alogoskoufis, International Macroeconomics
Fig.7SimulaEonofTimePathsforaSmallEmergingEconomy
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George Alogoskoufis, International Macroeconomics
Fig.8SimulaEonofTimePathsforaDevelopedEconomyinaTwoCountryWorld
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George Alogoskoufis, International Macroeconomics
Fig.7SimulaEonofTimePathsforanEmergingEconomyinaTwoCountryWorld
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George Alogoskoufis, International Macroeconomics
Conclusions• Foran“emerging”economy,whoseiniEalcapitalstockislowerthanintherestoftheworld,thepathofrealinterestratesunderfinancialopennesswillbebelowthecorrespondingpathofrealinterestratesunderautarky.
• Asaresult,underfinancialopenness,bothpercapitaconsumpEonandinvestmentwillbehigherduringtheadjustmentprocess.DuringthetransiEontothebalancedgrowthpath,theeconomythusrunscurrentaccountdeficitsandaccumulatesforeigndebt.Asitapproachesthebalancedgrowthpath,theprocessofforeigndebtaccumulaEonslowsdown,andtheeconomyapproachesaposiEonofexternalbalance.
• Onthebalancedgrowthpath,output(GDP)percapitaisthesameasunderautarky,butGrossNaEonalProduct(GNP)andconsumpEonpercapitaarelowerunderfinancialopennessthanunderautarky,sincetheeconomyhastopayinterestontheforeigndebtithasaccumulatedduringthetransiEon.
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George Alogoskoufis, International Macroeconomics
Conclusions(conEnued)• Theoppositeappliestoa“developed”economy,whoseiniEalcapitalstockishigherthantherestoftheworld.DuringthetransiEon,theeconomyrunscurrentaccountsurplusesandaccumulatesnetforeignassets.SteadystateconsumpEonpercapitawillbehigherunderfinancialopennessthanunderautarky,astheeconomyreceivesinterestontheforeignassetsthatithasaccumulatedduringthetransiEon.
• Therearebenefitsfrominter-temporaltradeforbothtypesofeconomies,as,duringthetransiEonpath,thepathoftheworldrealinterestratediffersfromthepathofautarkyrealinterestratesforbotheconomies.
• TheanalysishasbeenconductedundertheassumpEonofcommitmenttotheoriginallyopEmalplansandhasnotincorporatedtheproblemofEmeinconsistencyandtheincenEvestorepudiateonforeigndebt.IntheabsenceofinternaEonalcommitmentmechanismsfinancialopennessmaynotbeeasytoimplementandthebenefitsfrominter-temporaltradenoteasilyavailabletoeconomiesthatcannotpre-commitnottorepudiateontheirforeigndebt.
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