Suboptimal Market Equilibrium in a Small Open Economy in Conditions of Perfect Capital Mobility
DOI:
https://doi.org/10.18559/mavmq510Keywords:
Economic growth, Growth model, CapitalAbstract
We present the AK open-economy growth model describing a private sector economy (without an explicit public sector) in conditions of perfect capital mobility where agents may invest abroad or borrow any amount of capital at a fixed interest rate. We investigate the properties of a decentralized (free market) economy, where all the stakeholders (consumers and producers) pursue their individual interests; they take decisions to maximize their own benefits. For this purpose the optimal control is established, and then the market equilibrium determined. Due to the positive external eff ects of capital accumulation, which does not take into account the individual actors, a decentralized, free-market equilibrium is suboptimal. This proposition is mathematically proved by solving the analogous optimization problem which incorporates all the knowledge about an economy, including externalities (the so-called 'central planner' approach), and comparing the level of prosperity in both situations
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