A THIRD-GENERATION MODEL OF BOP CRISES

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A THIRD-GENERATIONMODEL OF BOP CRISES

• Based on Paul Krugman

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ASSUMPTIONCAPITAL DOES NOT CONSUME AND
LABOR DOES NOT SAVE
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Credit constraint
Assumption capital input enters with one-period
lag
, I is non-negative!
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Credit-constrained investment
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I-ACTUAL
45-DEGREE
H
L
I-expected
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THE HORIZONTAL LINE-SEGMENT A NEOCLASSICAL
EQUILIBRIUM
Given.
Note This explains the horizontal
segment-line in the figure.
is NOT varying with changes in
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Investment evaluated at current prices
The neoclassical segment
Recall that p is negatively related to
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H
L
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If p is pegged, y becomes endogenous
That is, two equilibria, as in the Figure for the
case where p is not pegged
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Price index of investment
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MITIGATING EFFECT CAPITAL INVESTMENT ENTERS
PRODUCTION WITH NO LAGS
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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).