Working Paper: NBER ID: w18956
Authors: Jonathan Heathcote; Fabrizio Perri
Abstract: This paper is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare.
Keywords: No keywords provided
JEL Codes: F21; F32; F36; F41; F43; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| faster output growth (O40) | faster consumption growth (F62) |
| faster output growth (O40) | inefficiencies in consumption risk sharing (D15) |
| inefficient resource allocation over the business cycle (E32) | significant welfare costs (D69) |
| partial financial liberalization (F30) | lower welfare (I38) |
| international quantities and portfolios consistent with efficiency (G15) | complex relationship between allocations and market dynamics (D51) |