Neoclassical Growth in an Interdependent World

We generalize the open-economy neoclassical growth model to allow for trade and capital market frictions and imperfect substitutability of goods and capital across countries. The multi-country model is tractable, amenable to quantitative analysis, and matches key empirical patterns such as gravity equations in trade and capital holdings. The degree of integration in trade and capital markets and their interaction shape adjustments to shocks and the speed of convergence to steady state. The model is well-suited to study counterfactual changes in both trade and capital market frictions, such as a decoupling between the United States and China.