Neoclassical Growth in an Interdependent World

Benny Kleinman, Ernest Liu, Stephen Redding and Motohiro Yogo
Additional contact information
Benny Kleinman: Princeton University
Ernest Liu: Princeton University and NBER

Working Papers from Princeton University. Economics Department.

Abstract: We generalize the closed-economy neoclassical growth model (CNGM) to allow for open goods and capital markets with imperfect substitutability between countries. We simultaneously model international trade, gross and net capital holdings at a point in time, and intertemporal savings decisions over time, and hence the current account. We show that our framework rationalizes the observed gravity equation relationships for trade and capital holdings in the data. We find a substantially slower speed of convergence to steady-state than in the CNGM. Furthermore, goods and capital market integration interact in non-trivial ways. With either free trade or free capital, convergence is faster than in CNGM. In contrast, under both free trade and free capital, convergence is slower than in CNGM. In response to counterfactual changes in bilateral trade frictions, reallocations of capital across countries lead to a substantially different incidence of static and dynamic welfare gains and losses than a world of capital market autarky.

Keywords: Economic Growth; International Trade; Capital Flows (search for similar items in EconPapers)
JEL-codes: F10 F21 F60 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.princeton.edu/~reddings/papers/NGIW_Paper.pdf

Related works:
Working Paper: Neoclassical growth in an interdependent world (2023)
Working Paper: Neoclassical Growth in an Interdependent World (2023)
Working Paper: Neoclassical growth in an interdependent world (2023)
Working Paper: Neoclassical Growth in an Interdependent World (2023)
Working Paper: Neoclassical Growth in an Interdependent World (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2023-02

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