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Based on Paul Krugman

A THIRD-GENERATION MODEL OF BOP CRISES: Interactions among balance-sheets, real exchange rate and investment. Based on Paul Krugman. A simplifying assumption: CAPITAL DOES NOT CONSUME AND LABOR DOES NOT SAVE. GDP. Aggregate demand. Real exchange rate:. Credit constraints:.

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Based on Paul Krugman

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  1. A THIRD-GENERATIONMODEL OF BOP CRISES:Interactions among balance-sheets, real exchange rate and investment Based on Paul Krugman

  2. A simplifying assumption: CAPITAL DOES NOT CONSUME AND LABOR DOES NOT SAVE. GDP Aggregate demand Real exchange rate:

  3. Credit constraints: Simplifying assumption: capital input enters production with one-period lag. Inputs’ markets are competitive Capital markets: arbitrage

  4. Credit-constrained investment: Actual (incentive-based) investment Expected (aggregate) investment

  5. I-actual 45-DEGREE H L I-expected

  6. If p is pegged, y becomes endogenous That is, two equilibria, as in the Figure for the case where p is not pegged

  7. One unit of capital good: A price index Capital input is an intermediate good

  8. First-order conditions:

  9. A NEOCLASSICAL EQUILIBRIUM: THE HORIZONTAL LINE-SEGMENT: Given. Note: This explains the horizontal segment-line in the figure. is NOT varying with changes in

  10. Investment evaluated at current prices The neoclassical segment Recall that p is negatively related to

  11. H L

  12. MITIGATING EFFECT: CAPITAL INVESTMENT ENTERS PRODUCTION WITH NO LAGS

  13. Note: the transfer problem works through both supply and demand changes Thus, dW/dI gets smaller as the investment-lag is reinstated (the previous case).

  14. Pegged real exchange rate y becomes demand-determined! A loop: W depends on y, which in turn depend on I; I depends on W through supply of credit.

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