International Transfers, the Relative Price of Non-Traded Goods, and the Current Account

Abstract

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Foreign aid and domestic absorption

“…4 The effects on gross investment and exports are more complicated. Brock and Turnovsky (1994) and Brock (1996) showed that a small open economy's long-run adjustment to aid will depend on the relative capital intensities of the traded and non-traded sectors. If aid increases demand for traded and non-traded goods, domestic output of the latter must expand; this attracts capital and labour into the non-traded sector.…”

Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect

“…It has been clearly demonstrated by several studies (Persson and Svensson, 1985;Brock, 1988Brock, , 1996Matsuyama, 1987Matsuyama, , 1988Buiter, 1989;Turnovsky, 1989a, 1989b), that that both investment behavior and savings behavior are crucial to the understanding of different exogenous shocks on the current account; thus, we extend the simple model by introducing production and capital accumulation functions into the model.…”

“…Brock and Turnovsky (1994) and Brock (1996) showed that if investment is in the form of non-traded goods, then even in the absence of any adjustment costs associated with investment, nondegenerate dynamics are obtained. Moreover, non-recursive dynamics are dependent upon the relative capital intensities of the traded goods and non-traded goods sectors only when the capital is in the form of nontraded goods.…”

“…4 A detailed analysis of the real exchange rate dynamics and their interaction with capital accumulation in a two-sector dependent economy can be found in Brock (1996) and Mahbub Morshed and Turnovsky (2004), with the latter showing that by incorporating the inter-sectoral adjustment costs of capital movement, both the dynamics of capital accumulation and real exchange rate were sensitive to the degree of adjustment costs.…”

A Formal Model of Krugman's Intuition on the J-Curve

“…In empirical words, the real domestic product should follow a Trend Stationary process. From a theoretical viewpoint, consumption and investment decisions may be linked by assuming endogenous terms of trade or incorporating a non-traded sector at the price of an increasing analytical complexity (see for example Sen and Turnovsky [1991], Brock [1996]). Concerning demand-side aggregates, the real expense and the habitual standard of living may be definitively higher in the new long-run equilibrium.…”