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Do Foreign Inflows Let Expectations Dominate History?

Goyal, Ashima (1998): Do Foreign Inflows Let Expectations Dominate History? Published in: Journal of Foreign Exchange and International Finance , Vol. 12, No. 3 (1998): pp. 189-207.

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Abstract

Investment is a function of the present value of expected future output. A change in the regime of foreign inflows can boost these expectations, so that investment propensities exceed savings. Even so, a pricing rule exists that ensures stability and maximizes expected profits. A macro dynamic system results in which there are two classes of equilibria, with high (low) capacity utilization associated with lower (higher) mark-ups. There are unique classes of adjustment paths approaching these equilibria, and medium-run growth cycles occur due to switches between these. Expectations can jump to either equilibrium, causing an endogenous amplification of shocks. In the case of a shock to foreign inflows supportive macroeconomic policies that tie the domestic to the world interest rate are required to achieve the highest feasible growth path.

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