We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state.

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Benny Kleinman, Ernest Liu, Stephen J. Redding and Motohiro Yogo

5 December 2023     Paper Number CEPDP1965

Download PDF - Neoclassical growth in an interdependent world

This CEP discussion paper is published under the centre's Trade programme.