Devaluation and investment in an optimizing model of the small open economy

Edward F. Buffie, Yongkul Won

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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 languageEnglish
Pages (from-to)1461-1499
Number of pages39
JournalEuropean Economic Review
Volume45
Issue number8
DOIs
StatePublished - 2001

Keywords

  • Capital accumulation
  • Devaluation
  • Investment

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