International Integration in Heterogeneous Agent Economies with Capital Market Imperfections
Zusammenfassung der Projektergebnisse
Regardless of the substantial amount of research that has been undertaken in the field of heterogeneous-agent models and incomplete markets throughout the last two decades, only recently attention was paid to open-economy issues. The narrowed focus on closed-economy settings constitutes a considerable shortcoming of this approach, given the empirical significance of the subject in today’s highly integrated world economy. Our research project aims at filling this gap in the existing literature. Of major interest is how international integration affects the macroeconomy regarding the direction and magnitude of cross-border capital flows, equilibrium prices, growth of domestic output, and the distribution of income and wealth within and between countries where agents are subject to borrowing constraints and individual risk. Our analysis covers aspects of entrepreneurship and we discuss the welfare effects and policy implications of international integration, to identify those members of society who are most likely to benefit or to suffer from globalization. Building on the little literature available in the context of open-economy Aiyagari/Huggett-type models, we pursue different modeling strategies to capture the effects of capital risk and credit frictions in the firm sector while also taking into account the impact of income risk, borrowing constraints on the household side, riskless wage income, and highly persistent shocks. We find that capital risk and credit market frictions contribute to explain the striking observation of capital flowing from poor to rich countries, but income risk, highly persistent shocks, and borrowing constraints which impede consumption smoothing restrict the range of possible parameter values. We derive two rules which explain the ambiguous outcome with high accuracy. As a second result, we find that financial integration not necessarily leads to a reduction in GDP in those countries where the interest rate increases under financial market liberalization. In the presence of capital risk or sufficiently tight financial constraints, we observe an accumulation-driven positive output effect. The ambiguity of output effects also finds its counterpart in the associated welfare effects. While a typical result for incomplete market economies is that financial integration harms the capital-exporting country, the positive GDP effect may translate in a welfare gain even for those members of society who suffer from the increase in the interest rate. As the underlying framework of dynamic general equilibrium models with incomplete markets and heterogeneous agents typically does not allow for closed-form analytical solutions, we develop software to perform our simulations and welfare comparisons. Our simulation platform is suited to evaluate different types of reforms - such as integrating economies or implementing fiscal policy instruments - which generally requires to take the entire adjustment path between equilibria into consideration. We also incorporate the analysis of endogenous long-run growth dynamics, which are mostly absent in standard incomplete market economies.
Projektbezogene Publikationen (Auswahl)
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(2013): The Effects of International Financial Integration in a Model with Heterogeneous Firms and Credit Frictions, CESifo Working Paper 4441, CESifo, München
Clemens, Christiane and Heinemann, Maik
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(2014): Opposition to Capital Market Opening, Applied Economics Letters, 21 (6), 425–428
Engler, Philipp and Wulff, Alexander
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(2015): Endogenous Growth and Wealth Inequality under Incomplete Markets and Idiosyncratic Risk, Journal of Macroeconomics, 45, 300–317
Clemens, Christiane and Heinemann, Maik
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(2015): Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results, BDPEMS Working Paper 2015-19, BDPEMS Working Paper Series
Heinemann, Maik and Wulff, Alexander
