Intersectoral Capital Reallocation, Real Exchange Rate and Uncertainty in a Small Open Economy Revisited

ARIEL COREMBERG

Buenos Aires

Congreso; International Economic Association XIIth World Congress; 1999

AAEP

The paper deals with intersectoral capital reallocation and related adjustment costs under uncertainty in a two-sector (tradables and non-tradables) small open economy. It presents a model in which a representative agent maximizes the expected rate of return on investment by reallocating capital across sectors. The relative price (inverse of the real exchange rate) that equates the relative returns to capital employed in each sector fluctuates endogenously with respect to the stochastic evolution of the Solow´s residual of production functions. Overshooting in the real exchange rate may be partially explained by the uncertainty and the inertia in the resources allocation of "status quo", regardless of longer-term changes in relative sectoral productivity.