Industrial Structure and Financial Capital Flows

Transcription

1 Industrial Structure and Financial Capital Flows Keyu Jin London School of Economics April 3, 2010

2 Introduction Two Engines of Integration: Commodity Trade Financial capital Flows Two types of trade Intratemporal trade Intertemporal trade This paper: develops a framework that integrates factor-proportions (intratemporal) trade with financial capital flows (intertemporal trade) Investigate how their interplay determines: Financial capital flows Sectoral and Aggregate Asset Prices

3 A Multi-country, Multi-sector Setup Two Countries: Home and Foreign Two Commodities: Cotton (labor-intensive) and Steel (capital-intensive) Two Factors: Capital (K) and Labor (N) Labor: immobile internationally Capital: mobile internationally Adjustment costs break factor price equalization (FPE)

4 What changes with multiple sectors? Consider a permanent labor force increase in Foreign: Two forces at work in determining capital flows: Standard effect: capital flows to where it is relatively scarce (Home to Foreign) New: composition effect capital flows to the location that specializes more in capital-intensive goods (Foreign to Home) If composition effect dominates: Reverse Capital Flows Investment comovement Asset Price comovement With basic ingredients, sharp and surprising results.

5 In a multi-sector model, 3 cases are encompassed: No factor-intensity differences: standard, neoclassical force Multiple sectors: neoclassical + composition effect Multiple sectors where most labor-intensive sector uses only labor as an input: composition effect

6 Model Ingredients Two-country OLG model with capital accumulation (Abel (Econometrica 2003)) Free and costless trade in goods and financial assets Multiple sectors that differ in factor intensity Adjustment costs to pin down capital stock and analyze the price of capital

7 Model Preferences: u(c t ) = (c t) 1 ρ 1 ρ Production of Intermediate Goods: Y it = (K it ) α i (A t N it ) 1 α i i = 1, 2, α 1 < α 2 Capital accumulation equation : Consumption index: K i,t+1 = ai φ it K 1 φ it [ m C t = γ 1 θ c θ 1 θ i it i=1 ] θ θ 1

8 Consumers Objective: max u(c y t ) + E tu(c o t+1 ) Constraints: Young: c y,h t = w h t j=h,f i=1 2 q j it k h,j Q(s)b h i,t+1 t+1 (s) s Old: c o,h t+1 = 2 j=h,f i=1 R j i,t+1 qj it k h,j i,t+1 + bh t+1 (s)

9 Equilibrium Home s Investment: I h t η t Y g t one sector: η t = λ k=0 Y (1 λ) k E t h t+k+1 Y g t+k+1 [ ] α 1 γ two sectors: η t = α 1 γ + α 2 (1 γ) η α 2 (1 γ) 1t + α 1 γ + α 2 (1 γ) η 2t } {{ } weighted-average share of global production In determining investment, more weight is put on the expected future share of capital-intensive-goods production Investment depends on the composition of production

10 The Composition Effect Special case: α 1 = 0 Commodity trade w t = w t = p 1t k 2t = k 2t t achieved through labor reallocation across sectors

11 The Composition Effect Special case: α 1 = 0 Commodity trade w t = w t = p 1t k 2t = k 2t t achieved through labor reallocation across sectors The neoclassical effect is effectively shut down

12 How is a marginal unit of savings allocated? Rental α 2 p 2t k α 2 1, is equalized across countries 2t Thus, Foreign allocates the marginal unit of savings to both countries, rather than locally, and in such a way that marginal adjustment costs are equalized η t = I t I g t = K init K g init Home s investment share of world GDP in any period t is determined by its initial capital intensity. If countries were initially symmetric, η t = 1/2.

13 Results (1) Investment comovement: I t ηy g t Current account CA = S I at Home Path dependence: (labor share: s l = 1 αγ) k t+1 = Θη φs l N g t Ñ t φs l ( kt ) 1 φs l e (ɛ N,t+1+ɛ A,t+1) Opposite of the one sector results.

14 Composition vs. Neoclassical Effect 0.11 Multiple Sector Case (Composition Effect Only) One Sector Model S/Y I/Y 0.15 I/Y S/Y -CA/Y CA/Y Relative Capital Labor Ratio Relative Capital Labor Ratio Figure: Impact effect of a change in k j k w

15 The General Case Special Case (α 1 = 0): FPE occurs after one period (through labor reallocation) Investment and Asset Prices always comove General Case: k it k it composition effect and neoclassical effect are competing Quantitative exercise: composition effect dominates Show conditions under which one dominates the other

16 5 Sectors When is the Composition Effect Strong Enough? Home Investment on Impact 2.6 Percentage Change in Investment mean=0.36 From Data Weighted Variance

17 Conclusion Potentially important interactions between intertemporal and intratemporal trade Link between global imbalances and specialization patterns Lucas puzzle revisited: trade drives capital flows Asset pricing implications: developing countries may purchase assets in advanced economies, with portfolios tilted towards capital-intensive assets