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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Animal spirits; multiple equilibria; growth cycles; pricing rule; stability
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development

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