To generalize the idea that capital outflow is beneficial to a capital-abundant country, I extended the two-country, two-period model to a two-country, infinite-horizon model. I’d like to discuss the evolution of current accounts and compare consumption paths between open and closed regimes.
The key factor in the model is the interest rates which depend on the marginal productivity of capital. A capital-abundant country will enjoy higher interest revenue if it exports parts of its capital to a labor-abundant country. So my first hypothesis is that the country’s consumption will decrease for sure in the initial period when the capital restriction is removed and will increase in the future. My second hypothesis is quite bold: the capital-abundant country is always capital abundant. In order to focus on the effect of capital movement on interest rate and welfare, I assume two countries are the identical except the initial capital stocks.
When I began modeling, I found myself get into big trouble. The calculation is a mess. It took hours and hours to rearrange the equations and hours and hours to correct the wrong rearrangement. The most significant contribution is that I found one hypothesis is related to the other under some strong conditions. But overall the final result is ambiguous and unsatisfactory, like it was in the two-period model.
A comment to myself: ambitious, incompetent though.
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