International Endogenous Growth, Macro Anomalies, and Asset Prices

SAFE Working Paper No. 83, BoL Working Paper No. 29/2016

62 Pages Posted: 24 Jan 2015 Last revised: 21 Jul 2016

Date Written: July 20, 2016

Abstract

This paper studies a two-country production economy with complete and frictionless fi nancial markets and international trade in which competition in R&D leads to endogenous new fi rm creation and economic growth. Current monopolists ("incumbents") and potential new fi rms ("entrants") compete in developing patents domestically. These innovative fi rms use both consumption goods in their R&D technologies to capture international technological spillovers. In the model speci fications with technology spillover one obtains that (i) the cross-country correlation of consumption growth is lower than the one of output growth; (ii) net exports are negatively correlated with output; (iii) the model matches the high co-movement of stock returns across countries. Furthermore, heterogeneity in the R&D technology bundle home bias parameters for incumbents and entrants enables the model to replicate the empirically rather moderate correlation between the R&D innovation probabilities of incumbents and entrants within a country. Moreover, the model produces a positive value premium. Finally, the exchange rate volatility is decreasing in the amount of technology spillovers.

Keywords: Innovation, Technology Spillover, Endogenous Growth, Long-run Risk, International Finance

JEL Classification: E22, F31, G12, O30, O41

Suggested Citation

Grüning, Patrick, International Endogenous Growth, Macro Anomalies, and Asset Prices (July 20, 2016). SAFE Working Paper No. 83, BoL Working Paper No. 29/2016, Available at SSRN: https://ssrn.com/abstract=2554286 or http://dx.doi.org/10.2139/ssrn.2554286

Patrick Grüning (Contact Author)

Latvijas Banka ( email )

K. Valdemāra iela 2A
Riga, 1050
Latvia

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