International Capital Markets and Non-Scale Growth

Abstract

New growth models exhibit scale effects, meaning that variations in the levels of key variables exert permanent influences on growth rates. Such predictions run counter to recent empirical evidence. In this paper we extend a general non-scale model to the open economy. With complete capital markets we find that only output and capital, but not consumption, retain their non-scale structure. Introducing capital market imperfections, the model is again fully non-scale. Debt subsidies are analyzed and shown to provide capital flow reversals consistent with the recent experience in East Asia.