Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223587
Authors: 
Marjit, Sugata
Mishra, Suryaprakash
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8515
Abstract: 
This paper explores the impact of credit market on the entrepreneurs and demand for credit in a credit constrained economy and the resultant impact on the capital flows. In standard trade models the capital flows across countries are explained as a result of the rate of return differentials due to presence/absence of capital among the countries whereby capital flows from the capital rich countries to capital poor countries. We show that the rate of return differentials could arise due to presence/absence of entrepreneurs, i.e., low price of capital in autarky may reflect lack of demand for credit due to scarcity of entrepreneurs and not capital abundance and eventually may lead to capital outflow from a capital scarce country. This is a different way of echoing the sentiment of the well-known “Lucas Paradox” which suggests that capital might flow from the poor to the rich countries. We also show the possibility of trade and capital flow being complements and not substitutes, as is usual in standard models.
Subjects: 
credit market imperfection
credit rationing
redistribution
entrepreneurs
capital flows
JEL: 
F21
F36
D63
G21
Document Type: 
Working Paper

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