PUB - Publikationen an der Universität Bielefeld

This paper analyzes the world economy model presented in Matsuyama (2002) with the help of numerical methods. We exhibit that his necessary and sufficient conditions for the asymmetric steady states do not cover all possible cases when the world interest rate is determined endogenously in the international financial market. Additional asymptotically stable asymmetric steady states emerge. Borrowing constraints can be binding for all countries in symmetric as well as asymmetric steady states. All countries converge to symmetric steady states if they are not credit rationed initially, if their initial conditions are sufficiently similar or if the sum of their initial conditions is sufficiently high, so that the productivity of investment project allows the capital accumulation of countries to adjust to the same level via the international financial market. In other words, the international financial market can function as an equalizing force as well as magnifying inequality.