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Endogenous Growth and External Balance in a Small Open Economy

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Abstract

This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate. Copyright Springer Science+Business Media New York 2014

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  • George Alogoskoufis, 2014. "Endogenous Growth and External Balance in a Small Open Economy," Open Economies Review, Springer, vol. 25(3), pages 571-594, July.
    • Handle: RePEc:kap:openec:v:25:y:2014:i:3:p:571-594
    DOI: 10.1007/s11079-013-9290-8
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    Cited by:

    1. George Alogoskoufis, 2019. "Greece and the Euro: A Mundellian Tragedy," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 136, Hellenic Observatory, LSE.
    2. Alogoskoufis, George, 2023. "The twin deficits, monetary instability and debt crises in the history of modern Greece," LSE Research Online Documents on Economics 120344, London School of Economics and Political Science, LSE Library.
    3. Leonid Azarnert, 2014. "Agricultural Exports, Tariffs and Growth," Open Economies Review, Springer, vol. 25(4), pages 797-807, September.
    4. Fabienne Lara Dascher, 2020. "Sustainable Debt Policy Rules and Growth in a Small Open Economy Model: Is a Balanced Government Budget Worthwhile?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 373-397, September.
    5. Alogoskoufis, George, 2021. "Asymmetries of financial openness in an optimal growth model," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).

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    More about this item

    Keywords

    Endogenous growth; External balance; Interest rates; Productivity; Fiscal policy; F4; O40; D9; E62;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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