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The impact of international capital flows in a three-sector open economy: a dynamic general equilibrium analysis

Akgül, Zeynep
This thesis examines the effects of international capital flows on economic growth by using a dynamic general equilibrium framework based on a three-sector Ramsey Model. In order to detect the impact of financial integration on production, allocation of resources across three sectors and consumption, two different economic environments are modelled. While the first model represents a closed economy with financial autarky, the second model examplifies a financially integrated open economy with partial capital mobility. Each of the models is calibrated to Turkish economy based on the data of the year 2006. The simulation results demonstrate that the presence of international capital flows, despite being limited by a borrowing constraint, reverses the impact of economic growth on production and resource allocation. It is found that even though the importance of production in tradable-goods sector diminishes in the absence of international capital flows, it increases in the open economy model. Moreover, the findings show that while production in the closed economy model simply adjusts to domestic demand, that of the open economy model is not constrained by it. This can be explained by the augmentative effect of partial capital flows on the impact of foreign demand on domestic production.