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Barriers to Global Capital Allocation

Author

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  • Bruno Pellegrino
  • Enrico Spolaore
  • Romain Wacziarg
Abstract
Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee.

Suggested Citation

  • Bruno Pellegrino & Enrico Spolaore & Romain Wacziarg, 2021. "Barriers to Global Capital Allocation," NBER Working Papers 28694, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28694
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    References listed on IDEAS

    as
    1. Enrico Spolaore & Romain Wacziarg, 2012. "Long-Term Barriers to the International Diffusion of Innovations," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 11-46.
    2. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
    3. Bruno Pellegrino, 2023. "The Devil You Know: Rational Inattention to Discrete Choices when Prior Information Matters," CESifo Working Paper Series 10331, CESifo.
    4. Ralph S. J. Koijen & Motohiro Yogo, 2019. "A Demand System Approach to Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1475-1515.
    5. Wioletta Dziuda & Jordi Mondria, 2012. "Asymmetric Information, Portfolio Managers, and Home Bias," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2109-2154.
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    Cited by:

    1. Fonseca, Luís & Nikalexi, Katerina & Papaioannou, Elias, 2023. "The globalization of corporate control," Journal of International Economics, Elsevier, vol. 146(C).
    2. Yasumasa Morito & Kenichi Ueda, 2024. "Bilateral Lucas Paradox," CARF F-Series CARF-F-581, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Todea, Anita, 2022. "Ancestry barriers to the cross-border diffusion of global market information," Finance Research Letters, Elsevier, vol. 49(C).
    4. Daniel Spiro, 2021. "An Open-Economy Ramsey-Cass-Koopmans Model in Reduced Form," CESifo Working Paper Series 9293, CESifo.
    5. Todea, Alexandru & Todea, Anita, 2023. "Genetic distance and stock market integration," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    6. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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