Hostname: page-component-8448b6f56d-sxzjt Total loading time: 0 Render date: 2024-04-24T18:21:32.563Z Has data issue: false hasContentIssue false
  • English
  • Français

THE EFFECTS OF INTERNATIONAL FINANCIAL INTEGRATION IN A MODEL WITH HETEROGENEOUS FIRMS AND CREDIT FRICTIONS

Published online by Cambridge University Press:  02 April 2018

Christiane Clemens  and
Maik Heinemann
Christiane Clemens*
Affiliation:
Bielefeld University and CESifo
Maik Heinemann
Affiliation:
University of Potsdam
*
Address correspondence to: Christiane Clemens, Faculty of Economics and Business Administration, Bielefeld University, P.O. Box 100131, 33501 Bielefeld, Germany; e-mail: cclemens@uni-bielefeld.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the consequences of international financial integration in a two-sector standard incomplete markets model with occupational choice under risk and financial constraints affecting entrepreneurial activity. We endogenize international productivity differences and discuss the implications of international integration for the macroeconomy, inequality, and welfare. Lending countries are characterized by tighter domestic constraints and experience an increase in gross national product, whereas the gross domestic product effect is ambiguous. We conclude that international integration is beneficial only for economies where there are substantial financial constraints on entrepreneurial activity. Otherwise, a majority of households suffer, due to the unequal distribution of welfare gains and losses across the heterogeneous population.

Keywords

Financial ConstraintsInternational Capital FlowsHeterogeneous AgentsOccupational Choice
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 7 , October 2019 , pp. 2815 - 2844
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Mathias Hoffmann, Vincenzo Quadrini, and Michael Woodford for helpful comments on earlier versions of this paper. We also thank the seminar participants at CESifo Munich, ETH Zurich, University of Zurich, ZEW Mannheim, DEGIT XV, CEF 2013, and EEA and Econometric Society 2010 meetings in Atlanta and Barcelona. This research, which is part of German Research Foundation (DFG) priority program 1578 on “Financial Market Imperfections and Macroeconomic Performance,” has been supported by DFG. The simulations were run on a Linux cluster at RRZN, Leibniz University of Hannover. We are grateful to the cluster team for their support.

References

REFERENCES

Ábrahám, Árpád and Cárceles-Poveda, Eva (2010) Endogenous trading constraints with incomplete asset markets. Journal of Economic Theory 145, 974–1004.10.1016/j.jet.2009.10.006Google Scholar
Aghion, Philippe, Fally, Thibault, and Scarpetta, Stefano (2007) Credit constraints as a barrier to the entry and post-entry growth of firms. Economic Policy, October 2007, 731–779.Google Scholar
Aiyagari, S. Rao (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109 (3), 659–684.10.2307/2118417Google Scholar
Angeletos, George-Marios and Panousi, Vasia (2011) Financial integration, entrepreneurial risk and global dynamics. Journal of Economic Theory 146, 863–896.10.1016/j.jet.2011.02.001Google Scholar
Antunes, António and Cavalcanti, Tiago (2013) The welfare gains of financial liberalization: Capital accumulation and heterogeneity. Journal of the European Economic Association 11 (6), 1348–1381.10.1111/jeea.12053Google Scholar
Aoki, Kosuke, Benigno, Gianluca, and Kiyotaki, Nobuhiro (2009) Adjusting to capital account liberalization. In Clarida, R. and Giavazza, F. (eds.), NBER International Seminar on Macroeconomics 2007, pp. 175–216. Chicago: University of Chicago Press.Google Scholar
Banerjee, Abhijit V. and Newman, Andrew F. (1993) Occupational choice and the process of development. Journal of Political Economy 101, 274–298.10.1086/261876Google Scholar
Bencivenga, Valerie R. and Smith, Bruce D. (1993) Some consequences of credit rationing in an endogenous growth model. Journal of Economic Dynamics and Control 17, 97–122.10.1016/S0165-1889(06)80006-0Google Scholar
Bohácek, Radim (2006) Financial constraints and entrepreneurial investment. Journal of Monetary Economics 53, 2195–2212.10.1016/j.jmoneco.2006.04.004Google Scholar
Bohácek, Radim (2007) Financial intermediation with credit constrained agents. Journal of Macroeconomics 29, 741–759.10.1016/j.jmacro.2006.03.003Google Scholar
Boyd, John H. and Smith, Bruce D. (1997) Capital market imperfections, international credit markets, and nonconvergence. Journal of Economic Theory 73, 335–364.10.1006/jeth.1996.2237Google Scholar
Buera, Francisco J. and Shin, Yongseok (2017) Productivity growth and capital flows: The dynamics of reforms. American Economic Journal: Macroeconomics 9 (3), 147–185.Google Scholar
Caballero, Ricardo J., Farhi, Emmanuel, and Gourinchas, Pierre-Olivier (2008) An equilibrium model of “global imbalances” and low interest rates. American Economic Review 98 (1), 358–393.10.1257/aer.98.1.358Google Scholar
Cagetti, Marco and De Nardi, Mariacristina (2006a) Entrepreneurship, frictions, and wealth. Journal of Political Economy 114 (5), 835–870.10.1086/508032Google Scholar
Cagetti, Marco and De Nardi, Mariacristina (2006b) Wealth Inequality: Data and Models. NBER working paper 12550, National Bureau of Economic Research, Cambridge, MA.10.3386/w12550Google Scholar
Carroll, Christopher D. (1997) Buffer–stock saving and the life cycle/permanent income hypothesis. Quarterly Journal of Economics 112 (1), 1–56.10.1162/003355397555109Google Scholar
Clemens, Christiane (2006) Monopolistic competition and entrepreneurial risk–taking. Economics Letters 93 (1), 68–74.10.1016/j.econlet.2006.03.050Google Scholar
Clemens, Christiane (2008) Imperfect competition and growth with entrepreneurial risk. German Economic Review 9 (2), 179–205.10.1111/j.1468-0475.2008.00430.xGoogle Scholar
Clemens, Christiane and Heinemann, Maik (2006) On the effects of redistribution on growth and entrepreneurial risk–taking. Journal of Economics 88 (2), 131–158.10.1007/s00712-006-0191-9Google Scholar
Clemens, Christiane and Heinemann, Maik (2010) On entrepreneurial risk–taking and the macroeconomic effects of financial constraints. Journal of Economic Dynamics and Control 34, 1610–1626.10.1016/j.jedc.2010.06.015Google Scholar
Domeij, David and Heathcote, Jonathan (2004) On the distributional effects of reducing capital taxes. International Economic Review 45 (2), 523–554.10.1111/j.1468-2354.2004.00135.xGoogle Scholar
Evans, David S. and Jovanovic, Boyan (1989) An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy 97 (4), 808–827.10.1086/261629Google Scholar
Evans, David S. and Leighton, Linda S. (1989) Some empirical aspects of entrepreneurship. American Economic Review 79 (3), 519–535.Google Scholar
Flodén, Martin and Lindé, Jesper (2001) Idiosyncratic risk in the United States and Sweden: Is there a role for government insurance? Review of Economic Dynamics 4, 406–437.10.1006/redy.2000.0121Google Scholar
Gentry, William M. and Hubbard, R. Glenn (2004) Entrepreneurship and household saving. Advances in Economic Analysis and Policy 4 (1), Article 8.10.2202/1538-0637.1053Google Scholar
Gertler, Mark and Rogoff, Kenneth (1990) North-South lending and endogenous domestic capital market inefficiencies. Journal of Monetary Economics 26, 245–266.10.1016/0304-3932(90)90022-VGoogle Scholar
Ghatak, Maitreesh and Jiang, Neville Nien-Huei (2002) A simple model of inequality, occupational choice, and development. Journal of Development Economics 69, 205–226.10.1016/S0304-3878(02)00059-7Google Scholar
Ghatak, Maitreesh, Morelli, Massimo, and Sjöström, Tomas (2001) Occupational choice and dynamic incentives. Review of Economic Studies 68, 781–810.10.1111/1467-937X.00190Google Scholar
Ghatak, Maitreesh, Morelli, Massimo, and Sjöström, Tomas (2007) Entrepreneurial talent, occupational choice, and trickle up policies. Journal of Economic Theory 137, 27–48.10.1016/j.jet.2006.02.007Google Scholar
Gourinchas, Pierre-Olivier and Jeanne, Olivier (2006) The elusive gains from international financial integration. Review of Economic Studies 73, 715–741.10.1111/j.1467-937X.2006.00393.xGoogle Scholar
Gourinchas, Pierre-Olivier and Jeanne, Olivier (2013) Capital flows to developing countries: The allocation puzzle. Review of Economic Studies 80 (4), 1484–1515.10.1093/restud/rdt004Google Scholar
Greenwood, Jeremy and Jovanovic, Boyan (1990) Financial development, growth, and the distribution of income. Journal of Political Economy 98, 1076–1107.10.1086/261720Google Scholar
Guvenen, Fatih (2009) An empirical investigation of labor income processes. Review of Economic Dynamics 12, 58–79.10.1016/j.red.2008.06.004Google Scholar
Holtz-Eakin, D., Joulfaian, D., and Rosen, Harvey S. (1994a) Entrepreneurial decisions and liquidity constraints. Rand Journal of Economics 25 (2), 334–347.10.2307/2555834Google Scholar
Holtz-Eakin, D., Joulfaian, D., and Rosen, Harvey S. (1994b) Sticking it out: Entrepreneurial survival and liquidity constraints. Journal of Political Economy 102 (1), 53–75.10.1086/261921Google Scholar
Huggett, Mark (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Control 17 (5–6), 953–969.10.1016/0165-1889(93)90024-MGoogle Scholar
Kanbur, S. M. (1979) Of risk taking and the personal distribution of income. Journal of Political Economy 87, 769–797.10.1086/260792Google Scholar
Kihlstrom, Richard E. and Laffont, Jean-Jacques (1979) A general equilibrium entrepreneurial theory of firm formation based on risk aversion. Journal of Political Economy 87, 719–748.10.1086/260790Google Scholar
King, Robert G. and Levine, Ross (1993a) Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108, 717–738.10.2307/2118406Google Scholar
King, Robert G. and Levine, Ross (1993b) Finance, entrepreneurship, and growth. Journal of Monetary Economics 32, 513–542.10.1016/0304-3932(93)90028-EGoogle Scholar
King, Robert G. and Rebelo, Sergio T. (1999) Resuscitating real business cycles. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, vol. 1B, pp. 927–1007. Amsterdam: North-Holland.10.1016/S1574-0048(99)10022-3Google Scholar
Lucas, Robert E. (1990) Why doesn't capital flow from rich to poor countries? American Economic Review 80 (2), 92–96.Google Scholar
Matsuyama, Kiminori (2004) Financial market globalization, symmetry-breaking and endogenous inequality of nations. Econometrica 72 (3), 853–884.10.1111/j.1468-0262.2004.00514.xGoogle Scholar
Matsuyama, Kiminori (2005) Credit market imperfections and patterns of international trade and capital flows. Journal of the European Economic Association 3 (2–3), 714–723.10.1162/jeea.2005.3.2-3.714Google Scholar
Meh, Césaire A. (2005) Entrepreneurship, wealth inequality, and taxation. Review of Economic Dynamics 8, 688–719.10.1016/j.red.2005.03.001Google Scholar
Mendoza, Enrique G., Quadrini, Vincenzo, and Ríos-Rull, José-Víctor (2009) Financial integration, financial development, and global imbalances. Journal of Political Economy 117 (3), 371–416.10.1086/599706Google Scholar
Minniti, Maria, Bygrave, William D., and Autio, Erkko (2005) Global Entrepreneurship Monitor. 2005 Executive Report, Babson College, Babson Park, MA and London Business School, London.Google Scholar
Obstfeld, Maurice (1994) Evaluating risky consumption paths: The Role of intertemporal substitutability. European Economic Review 38, 1471–1486.10.1016/0014-2921(94)90020-5Google Scholar
OECD (2000) OECD Employment Outlook 2000. Paris: OECD Publishing.Google Scholar
Prasad, Eswar, Rajan, Raghuram G., and Subramanian, Arvind (2006) Patterns of international capital flows and their implications for economic development. In Federal Reserve Bank of Kansas City (ed.), The New Economic Geography: Effects and Policy Implications, pp. 119–158. Kansas City: Federal Reserve Bank of Kansas City.Google Scholar
Quadrini, Vincenzo (1999) The importance of entrepreneurship for wealth concentration and mobility. Review of Income and Wealth 45 (1), 1–19.10.1111/j.1475-4991.1999.tb00309.xGoogle Scholar
Quadrini, Vincenzo (2000) Entrepreneurship, saving and social mobility. Review of Economic Dynamics 3 (1), 1–40.10.1006/redy.1999.0077Google Scholar
Romer, Paul M. (1990) Endogenous technological change. Journal of Political Economy 98 (5), S71–S102.10.1086/261725Google Scholar
Rouwenhorst, K. Geert (1995) Asset pricing implications of equilibrium business cycle models. In Cooley, Thomas F. (ed.), Frontiers of Business Cycle Research, pp. 294–330. Princeton, NJ: Princeton University Press.Google Scholar
Sandri, Damiano (2014) Growth and capital flows with risky entrepreneurship. American Economic Journal: Macroeconomics 6 (3), 102–123.Google Scholar
Storesletten, Kjetil, Telmer, Chris I., and Yaron, Amir (1999) The risk–sharing implications of alternative social security arrangements. Carnegie–Rochester Conference Series on Public Policy 50, 213–259.10.1016/S0167-2231(99)00028-7Google Scholar
Storesletten, Kjetil, Telmer, Chris I., and Yaron, Amir (2004) Cyclical dynamics in idiosyncratic labor market risk. Journal of Political Economy 112 (3), 695–717.10.1086/383105Google Scholar
Vale, Steven (2006) The International Comparability of Business Start-Up Rates. Final Report. OECD Statistics working paper STD/DOC(2006)4, OECD, Paris.10.2139/ssrn.986866Google Scholar