Publication Type
Working Paper
Version
publishedVersion
Publication Date
12-2011
Abstract
Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their 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.
Keywords
Financial development, financial frictions, foreign direct investment, incomplete markets, limited commitment, international capital flows
Discipline
Finance | International Economics
Research Areas
International Economics
First Page
1
Last Page
30
Publisher
SMU Economics and Statistics Working Paper Series, No. 17-2011
City or Country
Singapore
Citation
von Hagen, Jürgen and ZHANG, Haiping.
International Capital Flows with Limited Commitment and Incomplete Markets. (2011). 1-30.
Available at: https://ink.library.smu.edu.sg/soe_research/1320
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.