Minimum Investment Requirement, Financial Integration and Economic (In)stability: A Refinement to Matsuyama (2004)

Abstract

This note proposes a simple, more precise, necessary condition for symmetry breaking in Matsuyama (Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations, Econometrica, 2004 ), i.e., the positive interest rate response to income changes, which essentially arises from the assumptions of financial frictions and minimum investment size requirement of individual projects. This condition also holds under the more general settings. Thus, this note offers an empirically testable hypothesis, i.e., Matsuyama's symmetry breaking is more likely, if the interest rate response to income changes is positive and sufficiently large.