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Income and Substitution Effects of International Financial Integration: A Firm-Level Analysis

Author

Listed:
  • Felipe Saffie

    (University of Maryland)

  • Kei-Mu Yi

    (University of Houston)

  • Liliana Varela

    (London School of Economics)

Abstract

We characterize the micro-level reallocation of resources following a capital account liberalization using a unique firm-level data set from Hungary. We find that firms in industries that are more capital-intensive expand more, as do firms in industries producing goods with high income elasticities. We also find extensive within-industry reallocation that is also tied to the capital-intensity and income elasticity of the industries. These findings motivate developing a dynamic, firm-level, multi-sector open economy model with varying capital intensities and non-homothetic preferences. We calibrate the model and simulate a capital account liberalization that occurs during the economy's transition to its steady-state. We find that the model can replicate our empirical results, and that the long-run outcomes depend on the extent of the liberalization.

Suggested Citation

  • Felipe Saffie & Kei-Mu Yi & Liliana Varela, 2019. "Income and Substitution Effects of International Financial Integration: A Firm-Level Analysis," 2019 Meeting Papers 510, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:510
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