Foreign Capital and Economic Growth
This chapter focuses mainly on the nexus between international capital movements and long-run economic growth in open economies. The exposition emphasises real capital mobility to show how capital account balances may be determined over the longer term through an arbitrage process which tends to equalise the productivity of foreign financed capital and its international rental cost. It then models the transitional dynamics of international capital account adjustment for external deficit economies in response to world interest rate shocks and endogenous changes in the tax treatment of foreign versus domestic capital. It also considers the behaviour of financial claims to capital and the dynamics of economic growth for capital importing economies, before drawing conclusions about the policy significance of international capital movements.
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