Agriculture Reference
In-Depth Information
any change in the counterfactual return on installed capital, r j e , need not
be the same as the correspondng change n the opportunty cost of captal
expenditure, r j . Most often, in the short run, shocks change income and
savings and, therefore, expected returns in directions that differ from
corresponding short-run changes in the global interest rate—particularly
considering that physical capital is fixed in quantity and sectoral distribution
at this length of run. Even in long-run simulations, the global distribution
of physcal captal at the outset does not equalse rates of return across
regons and redstrbuton through the regonal allocaton of one year's
global savings is insufficient to redress such imbalances.
To include asset markets, region-specific money and homogeneous
nomnal bonds are ntroduced. Even though there s no nterregonal
ownership of installed capital in the initial database, regional bonds are
traded internationally, making it possible for savers in one region to finance
nvestment n another. 11 Cash n advance constrants cause households to
mantan portfolos ncludng both bonds and non-yeldng money and the
resultng demand for real money balances has the usual reduced form
dependence on GDP (transactons demand) and the nterest rate. Ths s
equated with the region's real money supply, where purchasing power is
measured in terms of its GDP deflator, P Y . Snce all domestc transactons
are assumed to use the home region's money, international transactions
require currency exchange. For this purpose, a single nominal exchange
rate, E j , is defined for each region. A single key region is identified (here
the US) relative to whose currency these nominal rates are defined. For
the US, then, E=1 and E j s the number of US dollars per unt of regon j 's
currency. In essence, we are adding to the real model one new equation
per regon (the LM curve lnkng the real money supply to GDP and the
interest rate) and one new (usually endogenous) variable per region, E j . 12
The blateral rate between regon i and regon j s then smply the
quotient of the two exchange rates with the US, E ij = E i /E j . Quotients such
as ths appear n all nternatonal transactons. The most straghtforward of
the nternatonal transactons n the orgnal model are trade transactons.
There the blateral exchange rate s smply ncluded n all mport prce
equations, along with cif/fob margns and trade taxes. In the case of savngs
and investment, the global pool of savings is accumulated in US dollars.
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