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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 CER-ETH Economics working paper series with number 05/40.

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Length: 26 pages
Date of creation: May 2005
Date of revision:
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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