 |
How Does Openness to Capital Flows Affect Growth?By Jordan Rappaport |
Abstract An average adjustment cost which is convex with respect to the rate of gross investment success-fully calibrates a neoclassical growth model to match real world observables including the transition paths of convergence speed, the shadow value of capital, interest rates, and savings rates. Comparing the open-economy and closed-economy versions of the calibrated model shows that relaxing the constraint that domestic savings finance domestic investment effects only a small increase in the growth rate of output per capita: less than one percentage point per year for an economy with current output 20 percent its steady-state level and less than one-half percentage point for an economy with current output 60 percent its steady-state level. Rather than higher growth, the main effect of openness to capital flows is higher current levels of consumption financed by large trade deficits. JEL Classification: E10, F43, O41 Key words: General Aggregative Models; Economic Growth of Open Economies; One, Two, and Multi-sector Growth Models Jordan Rappaport is an economist at the Federal Reserve Bank of Kansas City. The author is grateful for the advice and feedback of Robert Barro, Russell Cooper, Steven Durlauf, Andrew Filardo, Eric Fisher, David Laibson, Jason Martinek, Bent Sorensen, Steven Turnovsky, David Weil, and Jonathan Willis. The views expressed herein are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Rappaport E-mail: jordan.m.rappaport@kc.frb.org |