We study the effect of capital account liberalization using the model of a small open economy with two sectors. Capital inflows lead to a real appreciation in the short run and to a displacement of production toward non-tradable goods in the long run. We show to what condition this...

The last decade has been characterized by large current account de?cits in the US and by the relative growth of total factor productivity in emerging markets. This article lays down a model of a world economy where ?nancial integration between two countries (an industrial country and an emerging...