Working Paper: NBER ID: w31951
Authors: Benny Kleinman; Ernest Liu; Stephen J. Redding; Motohiro Yogo
Abstract: We generalize the open-economy neoclassical growth model to allow for trade and capital market frictions and imperfect substitutability of goods and capital across countries. The multi-country model is tractable, amenable to quantitative analysis, and matches key empirical patterns such as gravity equations in trade and capital holdings. The degree of integration in trade and capital markets and their interaction shape adjustments to shocks and the speed of convergence to steady state. The model is well-suited to study counterfactual changes in both trade and capital market frictions, such as a decoupling between the United States and China.
Keywords: Neoclassical growth model; International trade; Capital flows; Counterfactual policies
JEL Codes: F10; F21; F60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| goods market integration (F02) | speed of convergence to steady state (C62) |
| capital market frictions (G19) | domestic wealth accumulation (D14) |
| goods market integration (F02) | impulse responses to productivity shocks (O49) |
| capital market integration (F30) | impulse responses to productivity shocks (O49) |
| opening goods markets (F10) | speed of convergence increases (O47) |
| opening capital markets (G24) | speed of convergence increases (O47) |
| simultaneous opening of goods and capital markets (F32) | slows convergence (F62) |
| initial reallocation of capital (E22) | equalizes returns across countries (F62) |
| initial reallocation of capital (E22) | common rate of wealth accumulation (E21) |