Capital Mobility and World Interest Rates Under Open Economy
In case of a small open economy, we assume perfect capital mobility. By "small" we mean that an economy has very small share in the world markets. It has a negligible effect on interest rate. By perfect capital mobility, we mean that residents of a country have full access to goods and services and specially financial markets of the world. Because of this assumption of perfect capital mobility, the interest rate in our small open economy, r, must equal the world interest rate say, r*, the real interest rate prevailing in world financial markets: r = r*. This means that people in this small open economy will never borrow at more than r rate in home country.They will shift to international markets to borrow or invest, in case r > r*. Thus, we can say that, the interest rates in a small open economy are determined by the world markets. World interest rate (r*), on the other hand is determined by equilibrium of world saving and world investment.
Read more about this topic: Open Economy
Famous quotes containing the words capital, mobility, world, interest, rates, open and/or economy:
“Bob, it’s the second night of violence in this normally quiet, yet generally swinging, Casino Capital of the East.”
—John Guare (b. 1938)
“One set of messages of the society we live in is: Consume. Grow. Do what you want. Amuse yourselves. The very working of this economic system, which has bestowed these unprecedented liberties, most cherished in the form of physical mobility and material prosperity, depends on encouraging people to defy limits.”
—Susan Sontag (b. 1933)
“Desiccation of the world of sense,
Evacuation of the world of fancy,
Inoperancy of the world of spirit;
This is the one way, and the other
Is the same, not in movement
But abstention from movement;”
—T.S. (Thomas Stearns)
“There are persons who, when they cease to shock us, cease to interest us.”
—F.H. (Francis Herbert)
“[The] elderly and timid single gentleman in Paris ... never drove down the Champs Elysees without expecting an accident, and commonly witnessing one; or found himself in the neighborhood of an official without calculating the chances of a bomb. So long as the rates of progress held good, these bombs would double in force and number every ten years.”
—Henry Brooks Adams (1838–1918)
“Go forth under the open sky, and list
To Nature’s teachings,”
—William Cullen Bryant (1794–1878)
“War. Fighting. Men ... every man in the whole realm is in the army.... Every man in uniform ... An economy entirely geared to war ... but there is not much war ... hardly any fighting ... yet every man a soldier from birth till death ... Men ... all men for fighting ... but no war, no wars to fight ... what is it, what does it mean?””
—Doris Lessing (b. 1919)