About the Speaker:

Professor Böhm is with the Department of Economics, Bielefeld University. He holds a Ph.D. from the University of California, Berkeley (Advisor: G. Debreu). He has taught at Mannheim University, Universit Libre de Bruxelles and Universit Catholique de Louvain. His areas of interest include General Equilibrium, Welfare Economics, Macroeconomics, Dynamic Economics and Financial Markets. He is an Associate Editor of Macroeconomic Dynamics. His research has been published in the Journal of Economic Dynamics and Control, Mathematical Finance, Macroeconomic Dynamics and Journal of Economic Behavior and Organization, among others. He is also the author or co-author of many books.

Abstract:

The paper analyzes the consequences of integrating a market of government discount bond between identical economies when there exists a positive probability of the government to default. Under autarky such economies of overlapping generations of consumers with capital accumulation converge to a unique positive steady state when relative risk aversion increasing and concave and when substitutability in production is sufficiently high. When such an economy opens its bond market as a small open economy to the rest of the world, multiple stationary states and the poverty trap can arise. This occurs because the inverse demand for bonds in a perfect foresight steady state is not necessarily monotonic, due to the interaction of substitution and income effects. In a world economy with a continuum of small (atomless) economies and a common international bond market symmetry breaking in the sense of Matsuyamma may occur. The paper presents numerical evidence for the instability of the symmetric stationary state of the world economy. It is shown that there exist sufficient condition on the elasticities in production and on the demand for bonds for which the stationary symmetric world equilibrium becomes unstable and stable asymmetric states appear. Thus, the condition on the elasticities reveals an additional endogenous mechanism leading perfectly symmetric economies to diverge in the long run due to bond market integration.

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