Income and Substitution Effects of International Financial Integration: A Firm-Level Analysis

Felipe Saffie, Kei-Mu Yi and Liliana Varela

No 510, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We characterize the micro-level reallocation of resources following a capital account liberalization using a unique firm-level data set from Hungary. We find that firms in industries that are more capital-intensive expand more, as do firms in industries producing goods with high income elasticities. We also find extensive within-industry reallocation that is also tied to the capital-intensity and income elasticity of the industries. These findings motivate developing a dynamic, firm-level, multi-sector open economy model with varying capital intensities and non-homothetic preferences. We calibrate the model and simulate a capital account liberalization that occurs during the economy's transition to its steady-state. We find that the model can replicate our empirical results, and that the long-run outcomes depend on the extent of the liberalization.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:510

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