Logo
Munich Personal RePEc Archive

The Imbalanced Catch-up to Rational Expectations: Capital Flows during Convergence

Cozzi, Guido and Davenport, Margaret (2015): The Imbalanced Catch-up to Rational Expectations: Capital Flows during Convergence.

[thumbnail of MPRA_paper_71009.pdf]
Preview
PDF
MPRA_paper_71009.pdf

Download (624kB) | Preview

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.

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.