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 Y

• i

= .035 + .887 S Y

• i

+ ν2 with R2 = .91

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