research on international borrowing and lending
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Research on International Borrowing and Lending Costas Arkolakis - PowerPoint PPT Presentation

Research on International Borrowing and Lending Costas Arkolakis teaching assistant: Yijia Lu Economics 407, Yale February 2011 Feldstein Horioka (1980, Economic Journal) In 1980, Feldstein and Horioka showed that changes in countries


  1. Research on International Borrowing and Lending Costas Arkolakis teaching assistant: Yijia Lu Economics 407, Yale February 2011

  2. Feldstein Horioka (1980, Economic Journal) � In 1980, Feldstein and Horioka showed that changes in countries’ rates of national savings were closely related to the countries’ rates of investment � Examined 16 industrial countries over 1960-74 � Savings to GDP, Investment to GDP ratios

  3. Feldstein Horioka (1980, Economic Journal) �

  4. Feldstein Horioka (1980, Economic Journal) � Running a simple regression of investment to GDP on Savings to GDP they obtained � I � � S � + ν 2 with R 2 = . 91 = . 035 + . 887 Y Y i i � Finding hinges on imperfect capital mobility � Idea is that if we are in a closed economy, S = I � In a small economy with world interest r � , changes in S might be uncorrelated to changes on I � Notice that according to this integration capital integration might decrease ther coe¢cient on S / Y

  5. Bai Zhang (2010, Econometrica) � Bai and Zhang (2010, Econometrica) resolve the puzzle � Postulate …nancial constraints � They postulate a model where countries cannot borrow more than what makes them more willing to default than repay the debt � This speci…cations means a restriction on capital ‡ow mobility � Capital ‡ows decline, less risk-sharing

  6. Bai Zhang Results

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