Capital Allocation and Wealth Distribution in a Global Economy with Financial Frictions

Been-Lon Chen, Yunfang Hu () and Kazuo Mino
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Yunfang Hu: Graduate School of Economics, Kobe University

No 1045, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper constructs a two-country model in which fiÂ…rms with heterogeneous production efficiency are subject to fiÂ…nancial constraints. In our setting, the total factor productivity of the aggregate production function in each county depends on the cutoff level of production efficiency of Â…firms. We fiÂ…rst show that in the presence of international capital mobility, the cutoff condition is affected by the wealth distribution between the two countries. We then examine the existence and stability of the steady-state equilibrium of the world economy as well as the long-run impacts of real and fiÂ…nancial shocks. It is shown that, compared to global fiÂ…nancial shocks, global real shocks have larger impact on income and wealth in each country, especially if heterogeneity of production efficiency among Â…firms is sufficiently low. The tractability of the model made it possible to analytically derive the main results.

Keywords: two-country model; fiÂ…nancial frictions; Â…firm heterogeneity; wealth distribution; capital mobility (search for similar items in EconPapers)
JEL-codes: F21 F32 F41 (search for similar items in EconPapers)
Pages: 54pages
Date: 2020-10
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-ore
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