NDLI: International Capital Flows in the Model with Limited Commitment and Incomplete Markets

Content Provider	Springer Nature Link
Author	von Hagen, Jürgen Zhang, Haiping
Copyright Year	2014
Abstract	Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the empirical patterns of international capital flows between developed and developing countries in the past two decades. This paper integrates these two frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their respective effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output.
Starting Page	195
Ending Page	224
Page Count	30
File Format	PDF
ISSN	09237992
Journal	Open Economies Review
Volume Number	25
Issue Number	1
e-ISSN	1573708X
Language	English
Publisher	Springer US
Publisher Date	2014-01-28
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Financial development Financial frictions Foreign direct investment Incomplete markets Limited commitment International capital flows International Economics Development Economics European Integration Macroeconomics/Monetary Economics Economic Policy Financial Economics
Content Type	Text
Resource Type	Article
Subject	Economics and Econometrics

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1	Ministry of Education (GoI), Department of Higher Education	Sanctioning Authority	https://www.education.gov.in/ict-initiatives
2	Indian Institute of Technology Kharagpur	Host Institute of the Project: The host institute of the project is responsible for providing infrastructure support and hosting the project	https://www.iitkgp.ac.in
3	National Digital Library of India Office, Indian Institute of Technology Kharagpur	The administrative and infrastructural headquarters of the project	Dr. B. Sutradhar bsutra@ndl.gov.in
4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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