Forschungs- & Entwicklungsinformationsdienst der Gemeinschaft - CORDIS


INFINHET Berichtzusammenfassung

Project ID: 336748
Gefördert unter: FP7-IDEAS-ERC
Land: France

Mid-Term Report Summary - INFINHET (Within and across countries heterogeneity in international finance)

INFINHET aims at developing new dynamic multi-country macro-models to better account for the heterogeneity across agents and across countries in order to answer age-old questions in international macro such as the benefits from financial integration, the emergence and adjustment of external global imbalances, the joint dynamics of exchange rates and asset prices, the international transmission of shocks through financial linkages, the international dimension of fiscal policies in open economies.

The first part of INFINHET develops new numerical methods to solve for multi-country dynamic stochastic models with heterogeneous agents and/or countries, a necessary step to better incorporate risk in such models. Recent work joint with H. Rey and P.Winant studies the growth and welfare impact of financial integration together with the dynamics of capital flows in a risky world (see [1]). In line with the wave of liberalization in the 1990s, we focus on the financial integration of risky and capital scarce emerging countries with safer developed countries. Emerging countries initially attract capital to finance growth and capital accumulation but later on export capital for self-insurance. Thus, our model exhibits growth and capital flows reversals due to financial integration. Importantly, the need for insurance of risky countries dampens their benefits from integration. Safer developed countries might capture a larger share of the benefits --- particularly so if the demand and the price for insurance are high.
On-going work with F. Gomes and E. Faraglia revisits the question of capital taxation in a globalized world (see [2]). While standard models predict a ‘race-to-the-bottom’ of capital taxation in a financially integrated world, we show that this result does not hold when, due to the presence of country-specific aggregate risk, assets of different countries are imperfect substitutes. In such a framework, competing governments set positive capital tax rates, trading off the benefits of financing part of their spending on foreigners with their deterrent effect on capital accumulation.

The second part focuses on more long-term issues in dynamic overlapping generations growth models. It analyzes the importance of asymmetries across countries on macroeconomic outcomes, thus in an integrated capital market. Recent work with S. Guibaud and K. Jin (see [3]) studies how fast growth in financially underdeveloped emerging markets can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Related work with S. Guibaud and Z. Barany (see [4]) puts differences in aging together with differences in social security systems across countries as an important driver of capital flows. Importantly, fast growing emerging countries tend to age faster while being less able to borrow across generations (lower social security). This turns them into capital exporters as suggested by the data.
Finally, recent work with T. Choukhmane and K. Jin investigates the role of fertility restrictions in China (‘one-child policy’) in explaining its ‘savings glut’ --- more precisely the very high level of household savings in the country. The paper argues that as parents had to rely less on their children for old-age support, they accumulate more wealth for retirement. An extension of the latter paper with S. Guibaud and K. Jin (see [5]) studies the impact of the relaxation of the one-child policy together with the development of social security in China on savings and fertility decisions.

[1] Financial integration and growth in a risky world, 2015. N. Coeurdacier, H. Rey and P.Winant, NBER Working Paper 21817 and CEPR Discussion paper 11009.
[2] The international taxation of capital when assets are imperfect substitutes, 2015. N. Coeurdacier, E. Faraglia and F. Gomes. Work in Progress.
[3] Credit Constraints and Growth in a Global Economy, 2015. N. Coeurdacier, S. Guibaud and K. Jin.
American Economic Review, 105(9), 2838-81.
[4] The One-Child Policy and Household Savings", 2014. T. Choukhmane, N. Coeurdacier and K. Jin. Mimeo Sciences Po and LSE. Currently under revision at the American Economic Review.
[5] Fertility Policies and Social Security Reforms in China, 2014. N. Coeurdacier, S. Guibaud and K. Jin.
IMF Economic Review, 62(3), 371-408.

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