Competitiveness, 'Superstar' Firms and Capital Flows

Lidia Smitkova

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: In this paper, I study financial liberalization between economies that differ in their overall competitiveness. I first show that if firms compete oligopolistically, then competitiveness - relatively low aggregate unit costs of production - is a feature of an economy with fatter tailed productivity distribution and relatively more very large - 'superstar' - firms. Embedding this setup in a two-country model with heterogeneous agents and non-homothetic saving behaviour, I show that if home is more competitive, then: (1) it enjoys a higher aggregate profit rate than foreign; (2) its autarkic interest rate is lower than that in foreign; (3) should the two economies undergo financial liberalization, the capital will be flowing from home to foreign; (4) if one of the sectors is non-tradable, the capital inflows push up the wages in foreign, leading to further losses of competitiveness and to current account overshooting. I calibrate the quantitative version of the model to 8 European economies on the eve of the global financial crisis. I show that the competitiveness gap can explain 27% of variation in the current account imbalances incurred in the period. I conclude by discussing policies for rebalancing.

Date: 2022-06-24
New Economics Papers: this item is included in nep-fdg, nep-int and nep-reg
Note: ls654
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe2241.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2241

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().