Open Economies Review

, Volume 25, Issue 3, pp 571–594 | Cite as

Endogenous Growth and External Balance in a Small Open Economy

Research Article

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.

Keywords

Endogenous growth External balance Interest rates Productivity Fiscal policy 

JEL Classification

F4 O40 D9 E62 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of EconomicsAthens University of Economics and BusinessAthensGreece

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