Eleonora Cavallaro

Technological catching up, competitiveness and growth

We build an endogenous growth model for a technologically laggard country and analyse the implications for competitiveness when trade occurs in quality-differentiated products. We find that the conditions for an optimal growth with a balanced current account and no adverse terms-of-trade effects depend on the countrys ability to compete in ‘quality dominated markets’ thanks to a successful technological catching up. We argue that the greater the ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.

The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy

The paper presents a monetary growth model for a small emerging economy with a currency board arrangement. The integration into global financial markets determines an acceleration of debt-creating capital inflows that boosts growth and the prospect of future profits, and leads to the building-up of large imbalances in the public and private sectors. Financial fragility undermines the state of confidence and determines an endogenous capital reversal. At this stage, the strong commitment to maintain the peg leaves no room for stabilization purposes and leads to systemic instability. We run a continuous-time estimation of the non-linear differential equations system of the model, with reference to Argentina during the years of the currency-board arrangement. We find two steady-state solutions, corresponding to a high-interest rate and a low-interest rate equilibrium, respectively. The local stability and sensitivity analysis show that both equilibria are unstable and that the system is intrinsically fragile. We show that even a tighter fiscal policy, according to the prescriptions of international institutions, results ineffective in improving stability.

Distance and Beyond. What Drives Financial Flows to Emerging Economies

We build a model for the analysis of financial flows from advanced to emerging economies and introduce the quality dimension in cross-border asset trade. We reformulate the issue of transaction costs (Martin and Rey, 2004) in terms of a problem of trade in assets with different quality. The focus is on countries’ economic distance, as reflected in characteristics such as their institutional development, regulation of markets, enforceability of laws and political risk, and the impact on the expected inflows from the projects/assets. We further consider the spillover effects from the country of origin to the country of destination building on the idea that quality matters, but not always with the same intensity. We thus model “perceived�? quality as depending on investors’ financial stress condition. We show that, besides the typical size effect, higher quality leads to higher asset demand and asset prices and, in particular, changes in “perceived�? economic distance impact on the evolution of financial flows. We run econometric estimations for cross-border bank flows from advanced to emerging economies over the period 2005-2014 and analyze the interaction of market segmentation and global spillover effects in determining the changes occurred between the old and the new “normality�?, as well as the heterogeneity across groups of countries.