Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108096
Authors: 
Benczúr, Péter
Kónya, István
Year of Publication: 
2006
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2006/9
Abstract: 
This paper develops a flexible price, two-sector nominal growth model, in order to study the nominal aspects of capital accumulation (convergence). We adopt a classical model of a small open economy with traded and nontraded goods, and enrich its structure with gradual investment and a preference for real money holdings. This latter is motivated by the fact that a large fraction of less developed OECD country (in particular: new EU members) households' assets are local currency bank deposits. The modelling framework gives the following results: (1) the flexibility of the monetary regime (whether money or the exchange rate is allowed to fluctuate freely) matters; (2) under imperfect floating (like in a currency board), the level of the exchange rate has a medium-run impact on nominal and real variables but no long-run real effect; (3) along the real equilibrium path (which can be implemented by flexible exchange rates), capital accumulation implies an increase in the price of nontradables (a real appreciation); (4) under flexible exchange rates, capital accumulation also implies a nominal appreciation.
Subjects: 
two-sector growth model
household portfolios
q-theory
real effects of nominal shocks
equilibrium real exchange rates
JEL: 
F32
F41
F43
ISBN: 
9639588806
Document Type: 
Working Paper

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