Extrapolative Expectations and Capital Flows during Convergence
Journal
Journal of international economics
ISSN
0022-1996
ISSN-Digital
1873-0353
Type
journal article
Date Issued
2017-09
Author(s)
Abstract
How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
Yes
Publisher
NH Elsevier
Publisher place
Amsterdam [u.a.]
Volume
108
Start page
169
End page
190
Subject(s)
Eprints ID
253504