Capital market imperfections, international credit markets, and nonconvergence

John H. Boyd, Bruce D. Smith

Research output: Contribution to journalArticle

77 Scopus citations

Abstract

We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily convergemonotonicallyto the same steady state output level. Unrestricted international financial tradeprecludesotherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.Journal of Economic LiteratureClassification Numbers: E00, F00, F34, G14.

Original languageEnglish (US)
Pages (from-to)335-364
Number of pages30
JournalJournal of Economic Theory
Volume73
Issue number2
DOIs
StatePublished - Apr 1 1997

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