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Abstract We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial …rms use more productive technologies, but due to …nancial imperfections they must …nance investments through internal savings. State-owned …rms have low productivity but survive because of better access to credit markets. High-productivity …rms outgrow low-productivity …rms if entrepreneurs have su¢ ciently high savings. The downsizing of …nancially integrated …rms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition. (JEL: F43, G21, O16, O47, O53, P23, P31) We thank the two referees, Chong

Elhanan Helpman and Kenneth Rogoff. Comments on an earlier draft are gratefully acknowledged. Thanks to Evgenia Passari, Nicolas Govillot for their help with the US data. Thanks to Gian Maria Milesi-Ferretti and Philip Lane for providing us with the 2010 update of their dataset. Thanks to the editors and discussants Vincenzo Quadrini and Paolo Pesenti as well as Maury Obstfeld for detailed comments. Rey gratefully acknowledges support from ERC

The paper presents new stylized facts on the direction of capital flows. We find (i) international capital flows net of government debt and/or official aid are positively correlated with growth; (ii) sovereign debt flows are negatively correlated with growth only if debt is financed by another sovereign; (iii) public savings are robustly positively correlated with growth as opposed to private savings. Sovereign to sovereign transactions can fully account for upstream capital flows and global imbalances. These empirical facts contradict the conventional wisdom and constitute a challenge for existing theories. JEL Classification: F21, F41, O1

We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints, more severe in fast-growing countries, can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the U.S. and China corroborates our mechanism. Quantitatively, our model explains about 40 percent of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time. JEL Classification: F21, F32, F41

We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. In the model, firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. We show that when the dividend and capital gains tax cuts are unexpected and permanent, dividend payments, equity issuance, and aggregate investment rise immediately. By contrast, when these tax cuts are unexpected and temporary, aggregate investment falls in the short run. This fall allows firms to distribute large dividends initially in response to the temporary dividend tax cut. We also find that the effects of a temporary dividend tax cut are very different from those of a temporary capital gains tax cut.

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This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare.

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