We examine a model of a small open economy in which there is free international mobility of financial capital, investment in capital goods and a non-traded good.Such an environment is rich enough to explain several phenomena that are inexpicable in more barren models.We suggest an explanation of why saving and investment may be correlated even with no restrictions on trade in assets.We explain why a high saving country may nonetheless borrow from abroad to finace investment.We also provide an optimizing model of stages in the balance of payments.
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Engel et al. (1989) studied this question.