 Competitiveness, 'Superstar' Firms and Capital FlowsLidia Smitkova Janeway Institute Working Papers 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 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2217 Access Statistics for this paper More papers in Janeway Institute Working Papers from Faculty of Economics, University of Cambridge |
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