Introduction

The dynamic theory in Chapter 2 describes various new parameters governing international capital mobility. This chapter examines what we can learn from country-panel data about the magnitude of these additional parameters, corresponding calibration procedures, and the manipulation of the parameters with an aggregation program. The new parameter file containing parameters used in the dynamic theory is a GEMPACK header array file; its contents are listed in Table 3.1.

The first new parameter listed in Table 3.1 is INC. This parameter is the initial income level across simulations and is used to calculate welfare measures in multiperiod simulations. It is represented in the unit US$ millions. The rest of the parameters in Table 3.1 can be grouped according to their role in the model: lagged adjustment parameters, elasticity of rate of return to capital with respect to capital stock, and parameters determining the allocation of regional wealth and composition of regional capital. These three parameter types are discussed in turn in this chapter.

Parameters Determining Lagged Adjustments

The investment theory presented in Chapter 2 is expressed in terms of gross rather than net rates of return, and it allows only zero or positive gross rates of return. However, net of depreciation, rates of return may be negative, and they may decline to the negative of the depreciation rate.