Assessing International Efficiency

Jonathan Heathcote and Fabrizio Perri

No 9424, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare.

Keywords: International business cycles; international risk sharing; Long-run growth; Long-run risk; Real exchange rate (search for similar items in EconPapers)
JEL-codes: F21 F32 F36 F41 F43 F44 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Chapter: Assessing International Efficiency (2014)
Working Paper: Assessing international efficiency (2013)
Working Paper: Assessing International Efficiency (2013)
Working Paper: Assessing International Efficiency (2013)
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