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

Author

Listed:
  • Been-Lon Chen

    (Institute of Economics, Academia Sinica)

  • Yunfang Hu

    (Graduate School of Economics, Kobe University)

  • Kazuo Mino

    (Institute of Economic Research, Kyoto University)

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.

Suggested Citation

  • Been-Lon Chen & Yunfang Hu & Kazuo Mino, 2020. "Capital Allocation and Wealth Distribution in a Global Economy with Financial Frictions," KIER Working Papers 1045, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1045
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    References listed on IDEAS

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    More about this item

    Keywords

    two-country model; fiÂ…nancial frictions; Â…firm heterogeneity; wealth distribution; capital mobility;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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