economic growth and the current account - … · economic growth and the current account ... during...

George Alogoskoufis, International Macroeconomics

EconomicGrowthandtheCurrentAccount

AutarkyvsOpennessina

NeoclassicalGrowthModel

1


FinancialAutarkyvsOpenness

• Duringthe1950sandthe1960sthedomesEcfinancialsystemsofmostcountriesweresubjecttocapitalaccountrestricEons.

• CapitalaccountrestricEonsweregraduallyliKedandinthelastfortyyearsglobalfinancialtradinghasgrownexponenEally,leadingtoaneweraoffinancialglobalisaEon.

• Thislecturecomparesfinancialopennesswithautarkyinanextendedneoclassicalgrowthmodel,withadjustmentcostsforinvestment.

• WecanthuscompareboththeevoluEonofsavingsandinvestmentinthetransiEontowardsthebalancedgrowthpaths,andthebalancedgrowthpathsthemselves,underthetwoalternaEveregimes.

2


ConclusionsfromtheLiterature

• “Despiteperiodiccrises,globalfinancialintegraEonholdssignificantbenefitsandprobablyis,inanycase,impossibletostop—shortofasecondgreatdepressionorthirdworldwar.ThechallengefornaEonalandinternaEonalpolicymakersistomaintainaneconomicandpoliEcalmilieuinwhichthetrendofincreasingeconomicintegraEoncanconEnue.”ObsUeld(1998).

• “ThereisliYleevidencethateconomicgrowthandcapitalaccountopennessareposiEvelycorrelatedacrosscountries.Butthereislotsofevidencethatopeningthecapitalaccountleadscountriestotemporarilyinvestmoreandgrowfasterthantheydidwhentheircapitalaccountswereclosed.”Henry(2007).

3


OpennessintheNeoclassicalGrowthModel

• Intheclosedeconomyneoclassicalgrowthmodelitishabituallyassumedthatsavingsdeterminetheinvestmentrate.ThisisausefulsimplifyingassumpEonformostpurposes,butnotforstudyingopeneconomies.

• Inanopeneconomy,thecurrentaccountisdeterminedbythedifferencebetweensavingsandinvestment.Inordertomodelthedynamicsofthecurrentaccountinanon-trivialfashion,oneneedsaninvestmentfuncEonwhichisindependentofthesavingsfuncEon.

• Inthislecture,weuseaneoclassicalgrowthmodelofacompeEEveeconomy,augmentedbytheqtheoryofinvestment.ConsumerschooseindividuallyopEmalconsumpEonplans,andfirmschooseindividuallyopEmalinvestment(andemployment)plans,underthetwoalternaEveregimesoffinancialautarkyandopenness.

4


APreviewoftheConclusions

• Theanalysisoftheextendedneoclassicalmodelofasmalleconomyindicatesthatonthebalancedgrowthpathbothcapitalandoutput(GDP)percapitaarethesameunderfinancialautarkyandopenness.

• However,therearesignificantdifferencesunderthetwoalternaEveregimesduringtheadjustmentpathtothesteadystate.Thesedifferencesarisebecauseofthedynamicsofsavings,investmentandthecurrentaccountandtheaccumulaEonofnetforeignassetsunderfinancialopenness.

• ThedynamicsofthecurrentaccountunderfinancialopennessdependontheiniEalcapitalstock.Thus,theiniEalcapitalstockhasimplicaEonsforsteadystateconsumpEonandtherelaEonshipbetweengrossdomesEcproduct(GDP)andgrossnaEonalincome(GNI)percapitaalongthebalancedgrowthpath.

5


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.

6


FinancialOpennessandtheWelfareImplicaEonsofInter-temporalTrade• Therearebenefitsfromfinancialopennessandinter-temporaltradeforthiseconomy,as,duringthetransiEonpath,thepathoftheworldrealinterestratediffersfromthepathofautarkyrealinterestrates.

• Underfinancialopenness,an“emerging”economycanengageinbeneficialaddiEonalinter-temporaltrade,tradingoffhigherconsumpEonintheshortrun,forlowerconsumpEoninthelongrun.ThisiswelfareimprovingasthisopEonisnotavailableunderautarky.

• Foraslongastheautarkyrealinterestratediffersfromtheworldrealinterestrate,thesewelfarebenefitsexist.

7


A“Developed”SmallEconomyunderFinancialAutarkyandOpenness

• ForaneconomywithaniniEalcapitalstockthatexceedsthesteadystatecapitalstock(a“developed”economy),theoppositewouldapply.

• UnderfinancialopennessitwilliniEallyexperiencetradeandcurrentaccountsurpluses,andinthesteadystateitwillendupwithposiEvenetforeignassetsratherthanforeigndebt.

• ConsumpEonpereffecEveunitoflaborwillbehigherthanunderautarkyinthesteadystate,becausethecountryreceivesinterestpaymentsontheforeignassetsithasaccumulated.

• AlthoughsteadystateGDPpercapitaisthesameunderfinancialautarkyandopenness,GNPpercapitaishigherthanGDPpercapitaunderopenness,asthecountryreceivesinterestontheassetsithasaccumulatedvis-a-vistherestoftheworld.

8


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.

9


ARepresentaEveHouseholdModelofaGrowingEconomy

WeassumeaneconomypopulatedbyinfinitelylivedidenEcalhouseholds.Eachhouseholdhasagrowingnumberofmembers,eachofwhichsuppliesoneunitoflabor.

HouseholdjchooseschoosesaconsumpEonpathtomaximise,

10

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


TheInter-temporalBudgetConstraintoftheRepresentaEveHouseholdandtheEuler

EquaEonforConsumpEon

ThemaximizaEonproblemoftherepresentaEvehouseholdyieldsthefollowingfirstordercondiEonsforhouseholdandaggregateconsumpEon

11

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

∞

∫


ProducEon,Employment,InvestmentandInstantaneousProfitsofFirms

ProducersarecompeEEvefirms,employingcapitalandlabortoproduceahomogeneouscommodity.TheproducEonfuncEonoffirmiatEmetisassumedCobbDouglaswithconstantreturnstoscale,andisgivenby,

12

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)


TheOpEmizaEonProblemofFirms

Eachfirmchoosesanemploymentandaninvestmentplantomaximise,

13

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.


OpEmalEmploymentandInvestment

FromthefirstordercondiEonsforthemaximisaEonsubjecttotheproducEonfuncEonandthecapitalaccumulaEonequaEon,weget,

14

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


InterpretaEonofFirstOrderCondiEons

ThesefirstordercondiEonshavewellknowninterpretaEons:

• ThefirststatesthatfirmswillhirelaborunElthemarginalproductoflaborisequaltotherealwage.

• ThesecondisthecondiEonlinkingtheshadowpriceofinstalledcapitaltothegrossinvestmentrate.

• Thethirdstatesthattheusercostofcapital(ontheleKhandside)isequaltothemarginalproductcapital,whichconsistsofthemarginalproductofcapitalincurrentproducEon,plusthereducEonoffutureinvestmentcosts.

• ThefinalcondiEonisthetransversalitycondiEonthatthepresentvalueofthefuturecapitalstock,asEmegoestoinfinity,tendstozero.

15


AggregateFirstOrderCondiEonsforEmploymentandInvestment

16

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


TheAdjustmentPathandtheSteadyStateunderFinancialAutarky

• Wedefineasfinancialautarky,theregimeunderwhichtheeconomycannotborroworlendinternaEonally.

• Underfinancialautarky,equilibriuminthegoodsmarketrequiresthatdomesEcconsumpEonplusinvestmentareconEnuouslyequaltototaldomesEcoutput.

• Thus,financialautarkyisaregimeinwhichtheeconomybehavesasaclosedeconomy,anddomesEcinvestmentisalwaysequaltodomesEcsavings.

• TheproperEesofthemodelunderfinancialautarkyarewellknownfromthestandardRamsey-Cass-Koopmansmodelwithadjustmentcostsforinvestment(seeAbelandBlanchard1983).

17


TheModel:FinancialAutarky

18


SteadyStateunderFinancialAutarky

19


Fig.1DynamicAdjustmentunderFinancialAutarky

20


Fig.2TheTimePathsofOutputandConsumpEonunderFinancialAutarky

21


TheModel:FinancialOpenness

22


SteadyStateunderFinancialOpeness

23


Fig.3DynamicAdjustmentofInvestmentandtheCapitalStockunderFinancialOpeness

24


Fig.4TheTimePathsofOutput,ConsumpEonandtheTradeBalanceunderFinancialOpenness,inaSmallOpenEconomy

25


TheTwoCountryModel

26


Fig.5DynamicAdjustmentofInvestmentandtheCapitalStockinaTwoCountryWorld

27


Fig.6TheTimePathsOutput,ConsumpEonandTradeBalancesinaTwoCountryWorld

28


Fig.7SimulaEonofTimePathsforaSmallEmergingEconomy

29


Fig.8SimulaEonofTimePathsforaDevelopedEconomyinaTwoCountryWorld

30


Fig.7SimulaEonofTimePathsforanEmergingEconomyinaTwoCountryWorld

31


Conclusions• Foran“emerging”economy,whoseiniEalcapitalstockislowerthanintherestoftheworld,thepathofrealinterestratesunderfinancialopennesswillbebelowthecorrespondingpathofrealinterestratesunderautarky.

• Asaresult,underfinancialopenness,bothpercapitaconsumpEonandinvestmentwillbehigherduringtheadjustmentprocess.DuringthetransiEontothebalancedgrowthpath,theeconomythusrunscurrentaccountdeficitsandaccumulatesforeigndebt.Asitapproachesthebalancedgrowthpath,theprocessofforeigndebtaccumulaEonslowsdown,andtheeconomyapproachesaposiEonofexternalbalance.

• Onthebalancedgrowthpath,output(GDP)percapitaisthesameasunderautarky,butGrossNaEonalProduct(GNP)andconsumpEonpercapitaarelowerunderfinancialopennessthanunderautarky,sincetheeconomyhastopayinterestontheforeigndebtithasaccumulatedduringthetransiEon.

32


Conclusions(conEnued)• Theoppositeappliestoa“developed”economy,whoseiniEalcapitalstockishigherthantherestoftheworld.DuringthetransiEon,theeconomyrunscurrentaccountsurplusesandaccumulatesnetforeignassets.SteadystateconsumpEonpercapitawillbehigherunderfinancialopennessthanunderautarky,astheeconomyreceivesinterestontheforeignassetsthatithasaccumulatedduringthetransiEon.

• Therearebenefitsfrominter-temporaltradeforbothtypesofeconomies,as,duringthetransiEonpath,thepathoftheworldrealinterestratediffersfromthepathofautarkyrealinterestratesforbotheconomies.

• TheanalysishasbeenconductedundertheassumpEonofcommitmenttotheoriginallyopEmalplansandhasnotincorporatedtheproblemofEmeinconsistencyandtheincenEvestorepudiateonforeigndebt.IntheabsenceofinternaEonalcommitmentmechanismsfinancialopennessmaynotbeeasytoimplementandthebenefitsfrominter-temporaltradenoteasilyavailabletoeconomiesthatcannotpre-commitnottorepudiateontheirforeigndebt.

33

economic growth and the current account - … · economic growth and the current account ... during...

Documents