Financial Integration, Entrepreneurial Risk and Global Dynamics
DIANE Publishing, Apr 1, 2011 - 41 pages
How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk -- a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. This friction provides a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization. Illus. A print on demand report.
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accumulate more wealth agents Angeletos 2007 Assumption autarchic and integrated autarchic interest rate autarchic steady autarchic steady-state baseline bond holdings borrowing constraints capital accumulation capital stock capital-account liberalization characterization complete-markets consumption cross-country inequality current-account deficits dashed line discount rate effects of financial entrepreneurial activity entrepreneurial risk equilibrium Euler condition financial integration follows foreign asset position fraction function Furthermore global imbalances household human wealth idiosyncratic investment risk idiosyncratic risk implications income incomplete markets increase integrated steady intertemporal substitution labor Lemma long run lower macroeconomic marginal product market clearing Mendoza mimeo motive for saving NBER Working Paper neoclassical North North runs numbers ODE system Panousi parameterization poor precautionary motive precautionary saving product of capital Quadrini reform return to saving rich risk aversion risk premium risk-free risk-free rate risky safe asset safe sector short run solid line TFP growth transitional dynamics undiversifiable uninsurable idiosyncratic wages wealth distribution wedge welfare effects