Abstract
We analyze the impact of devaluation on sectoral investment, aggregate investment, and real output in a fully articulated, optimizing model of a small open economy where installed capital is sector-specific and new capital goods are constructed by combining nontraded inputs with non-competitive imported machines. Investment falls when the intertemporal elasticity of substitution and the share of domestically produced capital goods are not implausibly large. This result is robust to a wide range of parameter values and to the possibility that saving-investment decisions are made by heterogeneous agents instead of a representative agent.
Original language | English |
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Pages (from-to) | 1461-1499 |
Number of pages | 39 |
Journal | European Economic Review |
Volume | 45 |
Issue number | 8 |
DOIs | |
State | Published - 2001 |
Keywords
- Capital accumulation
- Devaluation
- Investment