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GLOBALIZATION, THE VOLATILITY OF INTERMEDIATE GOODS PRICES, AND ECONOMIC GROWTH

Published online by Cambridge University Press:  29 May 2012

Lucas Bretschger  and
Thomas Steger
Lucas Bretschger
Affiliation:
ETH Zurich
Thomas Steger*
Affiliation:
University of Leipzig and CESifo Munich
*
Address correspondence to: Thomas Steger, University of Leipzig, Institute for Theoretical Economics, Grimmaische Strasse 12, D-04109 Leipzig, Germany; e-mail: steger@wifa.uni-leipzig.de.
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Abstract

We set up a dynamic stochastic model of a stylized economy comprising a final output sector (with traditional and modern firms) and an intermediate goods sector. It is shown that market integration reduces the volatility of the rate of return to capital invested in modern firms. The induced portfolio decisions of households lead to a reallocation of capital from traditional to modern firms. Despite the presence of a reverse precautionary saving channel, the growth rate unambiguously increases because of the reallocation of capital. Empirical estimates for OECD countries support the theoretical results.

Keywords

GlobalizationTrade in Intermediate GoodsPortfolio DecisionsEconomic Growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 2 , March 2013 , pp. 402 - 430
Copyright
Copyright © Cambridge University Press 2012

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