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Risk, Nonconvergence and Cycles: A Two-Country Model

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  • Tomoo Kikuchi
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    Abstract

    We develop an overlapping generations model with asset and capital accumulation to analyze the interaction between the real economy and international asset markets. The world consists of two homogenous countries with an integrated asset market, which differ only in levels of their capital stock. Two period lived consumers transfer wealth over time and across countries by holding international assets with stochastic dividends. Short sale of assets allows poor economy to take credit for productive investment. Yet, risk aversion and expectations may preclude capital stock of both countries from converging while capital flows from the rich to the poor country. The poor country needs sufficiently high capital stock initially to catch up with the rich country. Cycles in capital stocks and international capital flows occur.

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    Bibliographic Info

    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_016.

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    Length: 27 pages
    Date of creation: Jun 2006
    Date of revision:
    Handle: RePEc:deg:conpap:c011_016

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    Keywords: International asset market; endogenous cycles; two-country model;

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    1. Volker Böhm & Nicole Deutscher & Jan Wenzelburger, 2000. "Endogenous Random Asset Prices in Overlapping Generations Economies," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 23-38.
    2. Kiminori Matsuyama, 2002. "Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations," CIRJE F-Series CIRJE-F-186, CIRJE, Faculty of Economics, University of Tokyo.
    3. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," CEPR Discussion Papers 1350, C.E.P.R. Discussion Papers.
    4. B hm, Volker & Wenzelburger, Jan, 2002. "Perfect Predictions In Economic Dynamical Systems With Random Perturbations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(05), pages 687-712, November.
    5. repec:cup:macdyn:v:6:y:2002:i:5:p:687-712 is not listed on IDEAS
    6. Day, Richard H, 1983. "The Emergence of Chaos from Classical Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 201-13, May.
    7. Volker Bohm & Carl Chiarella, 2000. "Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices," Research Paper Series 46, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    9. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
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