Investment, the current account, and the relative price of non-traded goods in a small open economy

Abstract

This paper incorporates traded and non-traded investment expenditure into an infinite-horizon setting with optimizing economic agents, extending previous research that has incorporated traded and non-traded investment into a two-period setting. The paper analyzes the dynamic adjustment of the relative price of non-traded output, the market price of capital, and the current account following exogenous shocks to the system. The exogenous shocks considered by the paper include permanent, transitory, and anticipated changes in an income tax and an investment subsidy as well as changes in the level of government purchases of traded and non-traded output.