The Effects of International Financial Integration in a Model with Heterogeneous Firms and Credit Frictions

30 Pages Posted: 2 Nov 2013

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2013

Abstract

This paper examines the consequences of international financial integration in a two-sector heterogeneous-agent dynamic general equilibrium model of occupational choice with financial constraints and idiosyncratic risks. We discuss the macroeconomic and distributional effects of financial market integration for small economies which differ only with respect to the tightness of constraints on the domestic credit market. The results contribute to an explanation of the ‘Lucas paradox’, i.e. the empirical observation of capital flowing from poor to rich countries, where lending countries are characterized by tighter domestic constraints and lower capital returns. Capital market liberalization goes along with adjustments towards the world return. Capital-exporting countries experience an increase in GNP, whereas the GDP effect is of ambiguous sign and driven by the tightness of the domestic credit market. Countries with less tight constraints or unlimited access to external business financing loose throughout integration due to a decline in aggregate output and a very unequal distribution of welfare gains and losses in the underlying heterogeneous-agent economy. We find that international integration is only beneficial for economies where financial constraints on entrepreneurial activity are very tight. Here, we observe an accumulation-driven rise in the entrepreneurship rate, overall positive output effects and welfare gains for all members of society.

Keywords: financial constraints, financial market integration, international capital flows, heterogeneous agents, occupational choice

JEL Classification: C680, D300, D800, D900, F400, G000, J240

Suggested Citation

Clemens, Christiane and Heinemann, Maik, The Effects of International Financial Integration in a Model with Heterogeneous Firms and Credit Frictions (October 31, 2013). CESifo Working Paper Series No. 4441, Available at SSRN: https://ssrn.com/abstract=2348057 or http://dx.doi.org/10.2139/ssrn.2348057

Christiane Clemens (Contact Author)

University of Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW 33613
Germany

Maik Heinemann

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
55
Abstract Views
547
Rank
453,152
PlumX Metrics