In this Appendix we discuss some of the more technical derivations that underlie the equations in the text.
To solve the household’s optimization problem we form the current value hamiltonian:
and the first order conditions are:
to which we add the accumulation constraints (10) and (11) from the text as well as the usual transversality conditions. From (A.2)-(A.4) we derive equation (14) in the text. Equation (15) follows from (A.5) once we define q = θ(1+αR)-1. From (A.6) we obtain the expression for Tobin’s q.
Abel, Andrew B., “Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model,” Journal of Monetary Economics No. 16, pp. 55–71 (1985).
Abel, Andrew B., and O. Blanchard, “An Intertemporal Model of Saving and Investment,” Econometrica, Vol. 51, No.3, pp. 675–692, (1983).
Aschauer, David and Jeremy Greenwood, “A Further Exploration in the Theory of Exchange Rate Regimes,” Journal of Political Economy, Vol. 91, pp. 868–75, (1983).
Brock, Philip, “Investment, the Current Account and the Relative Price of Non-traded Goods in a Small Open Economy,”, Journal of International Economics, No. 24, pp. 235–53, (1988).
Brock, Philip, and S. J. Turnovsky, “The Dependent Economy Model with both Traded and Nontraded Capital Goods,” NBER Working Paper No. 4500, (October 1993).
Calvo, Guillermo A., “Trying to Stabilize: Some Reflections Based on the Case of Argentina”, in Financial Policies and the World Capital Market: The Problem of Latin American Countries, (ed. by P. Aspe, M. Dornbusch, and M. Obstfeld), (Chicago: The University of Chicago Press, 1983).
- Search Google Scholar
- Export Citation
)| false “Trying to Stabilize: Some Reflections Based on the Case of Argentina”, in Financial Policies and the World Capital Market: The Problem of Latin American Countries, ( Calvo, Guillermo A., ed. by ), ( P. Aspe, M. Dornbusch, and M. Obstfeld Chicago: The University of Chicago Press, 1983).
Calvo, Guillermo A., “Temporary Stabilization: Predetermined Exchange Rates, Journal of Political Economy, Vol. 94 pp. 1319–29, (December 1986).
Calvo, Guillermo A., and Carlos A. Végh, “Credibility and the Dynamics of Stabilization Policy: A Basic Framework,” IMF Working Paper No. WP/90/110 (Washington, D.C., International Monetary Fund), (1990); forthcoming in the Proceedings of the VI World Congress of the Econometrics Society (Cambridge: Cambridge University Press).
- Search Google Scholar
- Export Citation
)| false “ Calvo, Guillermo A., and Carlos A. Végh, Credibility and the Dynamics of Stabilization Policy: A Basic Framework,” IMF Working Paper No. WP/90/110 ( Washington, D.C., International Monetary Fund), ( 1990); forthcoming inthe Proceedings of the VI World Congress of the Econometrics Society ( Cambridge: Cambridge University Press).
Calvo, Guillermo A., and Carlos A. Végh, “Exchange Rate Based Stabilization Under Imperfect Credibility,” IMF Working Paper No. WP/91/77 (Washington, D.C., International Monetary Fund), (August 1991).
Calvo, Guillermo A., and Carlos A. Végh, “Stabilization Dynamics and Backward-Looking Contracts”, unpublished, (Washington, D.C., International Monetary Fund), (1992).
Cooley, Thomas F. and Gary D. Hansen, “The Inflation Tax in a Real Business Cycle Model,” American Economic Review, Vol. 79, pp. 733–48, (1989).
De Gregorio, José, Pablo E. Guidotti and Carlos A. Végh, “Inflation Stabilization and the Consumption of Durables,” mimeo, International Monetary Fund, (Washington, D.C.), (1993).
De Gregorio, José, A. Giovannini and H. Wolf, and Carlos A. Végh, “International Evidence on Tradables and Nontradables Inflation”, NBER Working Paper No. 4438, (forthcoming, European Economic Review), (1993).
Dornbusch, Rudiger, “Stabilization Policies in Developing Countries: What Have We Learned?”, World Development, pp. 701–708, Vol. 10 (September 1982).
Feenstra, Robert C., “Anticipated Devaluations, Currency Flight, and Direct Trade Controls in a Monetary Economy,” American Economic Review, Vol. 51, No.3, pp. 386–401.
Giavazzi, F. and C. Wyplosz, “The Real Exchange Rate, the Current Account, and the Speed of Adjustment,” (C. Bilson and R. Marston, eds.) “Exchange Rates: Theory and Policy”, University of Chicago Press, (1983).
Helpman, Elhanan and A. Razin, “Exchange Rate Management: Intertemporal Tradeoffs, American Economic Review, Vol. 77, No.1, pp. 107–23.
Jones, Ronald W., “A Three Factor Model in Theory, Trade and History,” in Trade, Balance of Payments and Growth, ed. by J. Bhagwati (Amsterdam, North Holland, (1971).
Jones, Ronald W., S. T. Easton, “Factor Intensities and Factor Substitution in General Equilibrium,” Journal of International Economics, No.15, pp. 65–99, (1983).
Kravis, Irving B., A.W. Heston and R. Summers, “The Share of Services in Economic Growth,” Chapter 10 in “Global Econometrics: Essays in Honor of Lawrence R. Klein”, ed. by F.G. Adams and B.G. Hickman, MIT Press, (1983).
Mussa, Michael, “Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability and Intensity in the Short and Long Run.” Journal of Political Economy, Vol. 82, pp. 1191–1203, (1974).
Obstfeld, Maurice, “The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation”, Review of Economic Studies LII, pp. 605–25, (1985).
Rebelo, Sergio, “Inflation in Fixed Exchange Rate Regimes: The Recent Portuguese Experience”, in Torres F. and F. Giavazzi, eds., “Adjustment and Growth in the European Monetary Union”, Cambridge University Press, (1993).
Reinhart, Carmen and Carlos A. Végh, “Nominal Interest Rates, Consumption Booms, and Lack of Credibility: A Quantitative Examination,” forthcoming, Journal of Development Economics, (1994).
Rodriguez, Carlos A., “The Argentine Stabilization Program of December 20th,” World Development, Vol. 10, pp. 801–11, (September 1982).
Roldos, Jorge E., “A Dynamic Specific-Factors Model with Money,” Canadian Journal of Economics, Vol. XXV, pp. 729–42, (August 1992).
Ruffin, Roy and R.W. Jones, “Protection and Real-Wages: the Neoclassical Ambiguity,” Journal of Economic Theory, No. 14, pp. 337–48, (1977).
Sen, Partha and S.J. Turnovsky, “Deterioration of the Terms of Trade and Capital Accumulation: A Reexamination of the Laursen-Metzler Effect,” Journal of International Economics, No. 26, pp. 227–250, (1989).
Serven, Luis, “Capital Goods Imports, the Real Exchange Rate and the Current Account,” mimeo, (The World Bank, Washington, D.C), (1993).
Stockman, Alan C., “Anticipated Inflation and the Capital Stock in a Cash-in-Advance Economy,” Journal of Monetary Economics, Vol. 8 (1981).
Stockman, Alan C. “Effects of Inflation on the Pattern of International Trade”, Canadian Journal of Economics, Vol. XVIII, No.3, (August 1985).
Uribe-Echevarria, Martin, “Exchange-Rate-Based Inflation Stabilization: The Initial Real Effects,” mimeo, University of Chicago, (1993).
I wish to thank Donald J. Mathieson, Pierre-Richard Agénor, José De Gregorio, Gian Maria Milesi-Ferretti and Carlos Végh for useful discussions and suggestions. The views expressed in this paper do not necessarily reflect those of the International Monetary Fund.
One can think about the response of, for instance, the housing and retail sectors, public utilities and services like health and education.
Calvo (1983) presents a portfolio-balance model where demand and supply functions are not derived from first principles. In his model, it is the increase in the price of land, due to a portfolio shift, that leads to an increase in the demand for nontradables and a real appreciation. In our model, the increase in the demand for nontradables causes the real appreciation and this in turn leads to an increase in the price of land.
Serven (1993) obtains the opposite relationship between capital accumulation and the real exchange rate. This is due to the existence of only one domestic good that faces a downward-sloping demand in world markets. Capital accumulation leads to an increase in its supply that can only be absorbed with a fall in its relative price.
See Sen and Turnovsky (1989) and Serven (1993) for a similar strategy in one-sector models; the latter imposes also balanced private trade. Roldos (1991) solves for the path of net foreign assets in a two-sector model without linearizing the dynamic system.
Similar results were found in Roldos (1988). In that paper, however, there was no dynamic adjustment as the absence of adjustment costs implied an instantaneous exchange of foreign assets for capital.
We are thinking here of the supply response of manufactures or non-traditional - exports. As we discuss below, we interpret land broadly as capital that is slow to reproduce, i.e., probably including also infrastructure. Otherwise, the ranking of eq. (40) would not be valid for natural-resource exporters.