Trade and Capital Flows: A Financial Frictions Perspective

25 Pages·2010·0.28 MB·English

Trade and Capital Flows: A Financial Frictions
Perspective
Pol Antras and Ricardo Caballero
Michael Peters
International Breakfast, MIT, Spring 2010
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Motivation of the Paper
Classical HO view: Trade and Capital Mobility are substitutes,
i.e. trade reduces incentives to move capital to the south
Reasoning: Stolper-Samuelson implies that wages increase and
rental rates decrease in the South
With financial frictions: Trade and Capital Mobility are
complements, i.e. trade increases incentives to move capital to
the south
Reasoning:
1 Trade reduces misallocation of resources by decoupling
production and consumption decisions
2 Improved resource allocation increases rental rates
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
The Basic Intuition of the Mechanism
Financial Friction: Sector 1 can only use K units of capital
Low
Sector 2 therefore uses K units of capital
High
“Efficient” allocation of labor: L =L >>L =L
2 High 1 Low
But: Consumers disagree with that - they want both goods.
⇒ Capital-Labor-Ratios not equalized across sector
⇒ In particular: k too high so that rental rate is low
2
Hence: Financial Friction + Demand ⇒ Misallocation of
Factors
Note: If goods are perfect substitutes, financial constraints
have no effect
Role of Trade: Decouple production and consumption decision
⇒ Reduce misallocation ⇒ Increase rental rates
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
This Talk
1 Present the basic model (Cobb-Douglas
technology/preferences, countries differ only in financial
constraint)
1 Autarky, No Frictions
2 Autarky, Frictions
3 Trade, Frictions
4 Capital Mobility and Trade
2 Robustness with respect to
1 functional form assumptions
2 asymmetric technologies across sectors
3 asymmetric factor supplies across countries
4 Dynamic Environment
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Basic Environment
Cobb-Douglas Preferences
(cid:18)C (cid:19)η(cid:18) C (cid:19)1−η
1 2
U =
η 1−η
Symmetric Cobb-Douglas Technology
F (K ,L )=ZKαL1−α for i =1,2
i i i i i
Prices
(p ,p )=(1,p)
1 2
No frictions on labor markets
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Autarky, No Frictions
Good Market Clearing:
η Y kαL
= 1 = 1 1 (1)
1−η pY pkαL
2 2 2
MPL is equalized across sector
MPL (1−α)Zkα kα MPK kα−1
1= 1 = 1 = 1 = 1 = 1 (2)
pMPL p(1−α)Zkα pkα pMPK pkα−1
2 2 2 2 2
From (1):
K
k =k = =k
1 2
L
From (1) and (2):
L =ηL and L =(1−η)L
1 2
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Autarky Equilibrium, No Frictions
Equilibrium
K K L
1 = L1 = η and 2 = 2 =1−η
K L K L
(cid:18)k (cid:19)α (cid:18)K/L(cid:19)α
1
p = = =1
k K/L
2
w = (1−α)Zkα
R = αZkα−1
With trade: Complete specialization if p∗(cid:54)=1.
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Financial Frictions
Population consists of L workers, µ entrepreneurs and 1−µ
rentiers
Sector 1 is constrained in that
1 Only entrepreneurs can use its technology
2 Entrepreneur e faces borrowing constraints in that
Ie ≤θKe, θ >1
1
Aggregate endowment for sector 1:
K ≤θ(µK)<ηK
1
Holds with equality if E only invest in sector 1 (which will be
the case)
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Autarky Equilibrium with Frictions
Above we used only GM and LM to get
η Y Y /L L L L
1 1 1 1 1 1
= = = → =η.
1−η pY pY /L L L L
2 2 2 2 2
Hence: Labor Allocation is not affected by frictions. Reason:
1 CD Demand: Value-Share of Production is constant
2 CD Production: MPL∝APL
so that p has to do “all the work”
E.g. Different with CES-Demand:
Y L
ηpσ−1= 1 = 1
pY L
2 2
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective
Autarky Equilibrium with Frictions
Capital-Labor-Ratios:
K /K θµ 1−θµ
1
k (θ)= k = k <k < k =k (θ)
1 2
L/L η 1−η
p decreases due to “excess supply” of Y
2
(cid:18)k (θ)(cid:19)α
p(θ)= 1 <1=pNF
k (θ)
2
Wages are low
w(θ)=(1−α)Zk (θ)α <wNF
1
Return to capital in sector 2 are low
δ(θ)=αZp(θ)k (θ)α−1<αZkα−1=δNF
2
Misallocation in this economy
MPK k (θ)α−1 k (θ)
1 1 2
ξ(θ)= = = >1
pMPK2 p(θ)k2(θ)α−1 k1(θ)
Antras,Caballero TradeandCapitalFlows: AFinancialFrictionsPerspective