lecture 7- the benefits from financial globalisation Flashcards
what were the main sources of benefits from opening the capital account?
improved capital allocation across countries ( capital will flow to countries with higher marginal product of capital causing them to catch up)
increase aggregate productivity
risk sharing across countries ( international financial markets can provide insurance against country specific risks)
what is the market based version of the solow model?
the supply of loanable funds ( savings) comes from households
the demand for loanable funds come from firms, which borrow at the interest rate r
the market for loanable funds ( capital market) is perfectly competitive
what does the supply of loanable funds look like on a interest savings plane?
the savings rate in the Solow model is constant that is it doesn’t depend on the interest rate
what is the demand for capital of the firm as a function of the interest rate?
k=[a/r]^(1/1-a)
what is the relationship between the demand for loanable funds and the interest rate at t+1?
the demand for loanable funds is inversely related to the interest rate at t+1 as from the first order conditions of the firms
what is the assumption about the savings, depreciation rate and capital share in the solow model in an open economy and what does this result in?
the saving, depreciation rate and the capital share are the same across countries therefore the capital stock per capita at a steady state is equal across countries
what does the sum of the two countries capital account equal?
the sum of the capital accounts must be equal to zero
what does one frictionless capital market imply about the interest rate?
the fact that there is now only one frictionless capital market implies that given the initial capital stocks of the two countries, there is only one world interest rate at t=1 that clears the market
what occurs to the capital stock in an open economy at t=1 when the countries are autarkys?
the capital stock per capita in an open economy at t=1 is a weighted average of the capital stocks that would prevail in an autarky at t=1 given the countries intial conditions (K{1,0} and K{2,0})
what are the elusive welfare gains from financial globalisation?
Gourinchas and jeanne (2006) have found that the welfare gain of switching from financial autarky to capital mobility is only a 1% permanent increase in domestic consumption. this is because there are gains are only in the transitition to the steady state
what are the critisms of the elusive welfare gains from financial globalisation?
this result was obtained under the assumption that the developing country is identical to the developed country but in reality not all the parameters are the same across countries
in an endogenous growth model,Boucekkine et al. (2018) has shown that financial globalisation might increase the growth rate permanently.
If capital goods are assumed not be perfect substitutes, then the gains are much larger (Hoxha et al., 2014).
Does financial globalisation affect TFP (growth)?
In an influential cross-country study, Bonfiglioli (2008) has shown that financial integration does not affect capital accumulation, but it
positively affect productivity growth at aggregate level.
what are the two factors which affect output growth?
Output (per capita) growth can come from capital accumulation and productivity growth.
