Capital Goods Imports, the Real Exchange Rate and the Current Account
Author(s)
Serven, Luis
Abstract
Conventional open-economy aggregate models typically rule out capital goods imports – an assumption that is completely arbitrary. This paper shows that removing such an assumption in a standard intertemporal model with investment subject to adjustment costs has major consequences for the effects of macroeconomic policies and external shocks. Long-run output and the real exchange rate are inversely related. Fiscal policy disturbances and wealth transfers from abroad alter the long-run capital stock, and a fiscal expansion may have a crowding-in impact. The sign of the current account during the transition is ambiguous, and depends critically on intertemporal consumption substitutability and investment adjustment costs.
