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’ 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

Feldstein Horioka (1980, Economic Journal) �

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

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

Bai Zhang Results