TY - JOUR
T1 - Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis
AU - Pham, Dai
AU - Delpachitra, Sarath
PY - 2014/12/1
Y1 - 2014/12/1
N2 - This paper examines the investment-enhancing effect of real exchange rate (RER) depreciation in a two-sector small open economy model where a representative firm in the tradable sector maximises its discounted profit over an infinite planning period. In this framework, a one-time, permanent, unanticipated depreciation in the RER leads to a higher steady-state level of capital stock and investment. This consequently increases the optimal investment rate associated with an arbitrary level of capital stock as the saddle path shifts upwards. In the benchmark calibration, the investment-enhancing effect of RER depreciation is sizeable. One per cent depreciation in the RER leads to an increase of 0.4444 per cent in the rate of capital accumulation.
AB - This paper examines the investment-enhancing effect of real exchange rate (RER) depreciation in a two-sector small open economy model where a representative firm in the tradable sector maximises its discounted profit over an infinite planning period. In this framework, a one-time, permanent, unanticipated depreciation in the RER leads to a higher steady-state level of capital stock and investment. This consequently increases the optimal investment rate associated with an arbitrary level of capital stock as the saddle path shifts upwards. In the benchmark calibration, the investment-enhancing effect of RER depreciation is sizeable. One per cent depreciation in the RER leads to an increase of 0.4444 per cent in the rate of capital accumulation.
UR - http://onlinelibrary.wiley.com/doi/10.1111/1467-8454.12031/abstract
UR - http://www.scopus.com/inward/record.url?scp=84925440697&partnerID=8YFLogxK
U2 - 10.1111/1467-8454.12031
DO - 10.1111/1467-8454.12031
M3 - Article
SN - 0004-900X
VL - 53
SP - 230
EP - 244
JO - Australian Economic Papers
JF - Australian Economic Papers
IS - 3-4
ER -