a1 Bielefeld University
The paper analyzes an endogenous mechanism leading perfectly symmetric economies to diverge in the long run after unifying their financial asset markets. The standard growth model with overlapping generations of consumers (OLG) is extended to include uncertainty and a financial asset. In the absence of an international asset market, the two autarkic economies converge to the same globally attracting steady state under rational expectations dynamics. When the two asset markets are unified internationally, additional asymmetric steady states appear, implying that the steady state with equal levels of capital becomes unstable, causing symmetry breaking. The paper derives general sufficient conditions for a saddle node bifurcation of the symmetric steady state. A numerical example shows that these effects occur, in particular when the production function and the function of absolute risk aversion are isoelastic.
This paper was written as part of the project “International Financial Markets and Economic Development of Nations” supported by the Deutsche Forschungsgemeinschaft under contract BO 635/12-1,2. We are indebted to two referees and an associate editor for helpful comments and suggestions.