Why this model could not account for the feldstein-horioka

Reference no: EM131139092

Consider the baseline AK model studied in Chapter 11, and suppose that countries have the same production technology, but differ according to their discount rates ρj . Show that there are persistent differences in saving and investment rates across countries that are correlated, even in the presence of free financial flows across countries. Provide a precise intuition for this result. Explain why this model could not account for the Feldstein-Horioka puzzle (see Section 19.2.2), which does not refer to the correlation between saving and investment in levels but in differences. Can you extend this model to account for the Feldstein-Horioka puzzle?

Reference no: EM131139092

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