Ciclo de seminarios Centro de Economía Aplicada (CEA) - Instituto Milenio MIPP

Invitado: Enrico Spolaore, Tufts University.

Título de la exposición: “Barriers to Global Capital Allocation”.

Abstract

International portfolios and heterogeneity in the rate of return to capital across countries are hardto reconcile with frictionless capital markets. In this paper, we develop a quantitative theory ofinternational capital allocation: a multi-country dynamic general equilibrium model in which the entirenetwork of cross-border investment is endogenously determined.

The model features not only countryheterogeneity in fundamental risk but also, crucially, a rich set of policy and information frictions thatdistort international capital flows. It embeds rationally-inattentive investors and produces closed-formsolutions for international portfolios that follow a logit form. We take the model to the data using aparsimonious (yet easily extensible) set of frictions: capital income taxes, political risk, and measuresof geographic, linguistic, and cultural distance between countries.

Our framework accounts well forinternational portfolio patterns, the cross-section of home bias and rates of returns to capital, andother key features of international capital markets. Finally, we perform counterfactual exercises: inparticular, we show that barriers to international investment reduce world output by about 6% andcan account for nearly half of the observed cross-country inequality in capital per employee.