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ENDOGENOUS INEQUALITY OF NATIONS THROUGH FINANCIAL ASSET MARKET INTEGRATION

Published online by Cambridge University Press:  05 May 2010

Volker Böhm  and
George Vachadze
Volker Böhm*
Affiliation:
Bielefeld University
George Vachadze
Affiliation:
Bielefeld University
*
Address correspondence to: Volker Böhm, Department of Economics, Bielefeld University, Postfach 100 131, D-33501 Bielefeld, Germany; e-mail: vboehm@wiwi.uni-bielefeld.de.
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Abstract

The paper analyzes an endogenous mechanism leading perfectly symmetric economies to diverge in the long run after unifying their financial asset markets. The standard growth model with overlapping generations of consumers (OLG) is extended to include uncertainty and a financial asset. In the absence of an international asset market, the two autarkic economies converge to the same globally attracting steady state under rational expectations dynamics. When the two asset markets are unified internationally, additional asymmetric steady states appear, implying that the steady state with equal levels of capital becomes unstable, causing symmetry breaking. The paper derives general sufficient conditions for a saddle node bifurcation of the symmetric steady state. A numerical example shows that these effects occur, in particular when the production function and the function of absolute risk aversion are isoelastic.

Keywords

Asset Market IntegrationCapital AccumulationNonconvergenceSymmetry Breaking
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 3 , June 2010 , pp. 285 - 310
Copyright
Copyright © Cambridge University Press 2010

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References

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