Research Fields:  International Macroeconomics, Economic Growth and Development, International Finance, and Political Economy

Working Papers:

Increasing Returns, Institutions, and Capital Flows

(This version: April 2010)

Abstract: 

This paper empirically tests the explanations for why capital has not flowed from the rich to the poor countries as much as we would expect if there were diminishing marginal productivity of capital.  Particularly, I contrast my work to that of Alfraro, Kalemli-Ozcan, and Volosovych, (2008), who claim that initial capital does not affect capital inflows when controlling for institutional quality.  I also find that institutional variables are a very important factor, but it does not account for the “Lucas Paradox;” evidence of increasing returns still exists, even when controlling for institutional quality and other variables.  In addition, I find that poor countries may have different determinants of capital flows than rich countries, such as with government size and taxes, agricultural production, and initial capital.  The evidence suggests that there could be a threshold income level, or set of conditions, where a country receives significantly more capital flows if it has a sufficiently high initial income.

JEL Classifications:  F21, F41, O1

Keywords: Economic freedom, increasing returns, international capital flows, Lucas paradox.

Job Market Paper:  Increasing Returns, Collateral, and Sovereign Debt

(This version: December 2009)

Abstract: 

This paper examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem.  The paper models sovereign borrowing with a two-sector economy: one sector with increasing returns (IRS) and one sector with diminishing returns (DRS).  Countries with incomes below a threshold will only invest in the DRS sector, and countries with incomes above a threshold will invest mostly in the IRS sector.  A lender may only give enough loans for the borrower to invest in the DRS sector if the IRS sector does not provide sufficient collateral.  If a sovereign borrower can increase collateralization in the DRS sector, it may be able to drastically increase its investment in the IRS sector.  The effectiveness of foreign aid will have a non-monotonic relationship with increases in income.  A twin-peak income distribution is also supported in the model.

JEL Classifications:  E22, E43, E44, F21, F34, F41

Keywords: International capital flows, increasing returns, sovereign debt, poverty trap, income distribution

International Lending with Increasing Returns and Moral Hazard

(This version: September 2009)

Abstract:

This paper examines the effects of increasing returns to investment on international lending and borrowing with moral hazard.  Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country.  I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically.  I also show how the open economy equilibria interest rates can lie outside the interval of autarky rates.

JEL Classifications:  D82, E22, E43, E44, F21, F34, F41

Keywords: International capital flows, increasing returns, moral hazard, north-south lending, world interest rates.