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Globalization, the volatility of intermediate goods prices and economic growth

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Author Info
Thomas M. Steger () (Center of Economic Research at ETH Zurich)
Lucas Bretschger () (Center of Economic Research at ETH Zurich)

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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 of capital invested in modern firms. The induced portfolio decision of households then leads to reallocation of capital from traditional to modern firms. Despite the presence of a reverse precautionary saving channel, the growth rate unambiguously increases due to the reallocation of capital. Empirical estimates for OECD countries confirm the theoretical results

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series Economics working paper series with number 05/40.

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Length: 26 pages
Date of creation: May 2005
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Handle: RePEc:eth:wpswif:05-40

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Related research
Keywords: globalization trade in intermediate goods portfolio decisions economic growth

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Find related papers by JEL classification:
F1 - International Economics - - Trade
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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Cited by:
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  3. Urs von Arx, 2005. "Principle guided investing: The use of negative screens and its implications for green investors," Economics working paper series 05/45, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  4. Urs von Arx & Andreas Schäfer, 2007. "The Influence of Pension Funds on Corporate Governance," Economics working paper series 07/63, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  5. Christoph Heinzel & Ralph Winkler, 2007. "The role of environmental and technology policies in the transition to a low-carbon energy industry," Economics working paper series 07/71, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  6. Simone Valente, 2006. "Trade, Envy and Growth: International Status Seeking in a Two-Country World," Economics working paper series 06/53, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
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  7. Hans Gersbach & Markus Müller, 2006. "Elections, Contracts and Markets," Economics working paper series 06/56, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
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  8. Volker Hahn, 2007. "Information Acquisition by Price-Setters and Monetary Policy," Economics working paper series 07/73, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  9. Karen Pittel, 2006. "A Kuznets Curve for Recycling," Economics working paper series 06/52, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  10. Christa N. Brunnschweiler, 2006. "Financing the alternative: renewable energy in developing and transition countries," Economics working paper series 06/49, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  11. Lucas Bretschger, 2005. "Taxes, Mobile Capital, and Economic Dynamics in a Globalising World," Economics working paper series 05/43, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
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