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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.
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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 

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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

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