Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation
IMF Working Papers, February 1, 2004
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- Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation
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Bibliographic details
- Authors: Vladimir Klyuev
- Published: February 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451845051.001
Overview
- Paper introduces a tractable capital market friction mechanism that allows a break of the parity between domestic and external interest rates.
- Friction is derived from explicit microfoundations.
- Friction generates a gradual evolution of capital stock and other macroeconomic variables, in contrast to the instantaneous convergence found in models with interest rate parity.
Friction Mechanism
- The cost of new loans is an increasing function of net borrowing.
- This cost function creates deviations from interest rate parity by making domestic borrowing costs respond to net borrowing volumes.
Key Findings
- The introduced friction permits a break of the parity between domestic and external interest rates.
- Capital stock and other macroeconomic variables evolve gradually under the friction mechanism.
- Models that impose interest rate parity exhibit instantaneous convergence; the friction model does not.
Implications
- Modeling capital market frictions with microfounded loan-cost schedules can change dynamic adjustment properties of open economy models.
- Gradual adjustment of capital accumulation and macroeconomic variables follows when loan costs rise with net borrowing.