Labor Market Frictions, Investment and Capital Flows

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Title: Labor Market Frictions, Investment and Capital Flows
Authors: Struck, Clemens C.
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Date: Dec-2017
Abstract: The standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines. This investment response contrasts with the empirical evidence that suggests a rather hump-shaped investment behavior. In this paper, I present a two-country general equilibrium model that generates hump-shaped investment responses from labor market frictions. In the model, I decompose investment into tradable and non-tradable components and show that an increase in the growth rate of a country results in scarcities of the non-tradable components which raise the relative price of investment goods. These scarcities occur because labor is unable to reallocate quickly between sectors within economies.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Keywords: Investment pricesCapital flowsCurrent accountGlobal imbalancesCapital returnsLabor market frictionsTrade frictions
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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