The standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines. This investment response contrasts with the empirical evidence that suggests a rather hump-shaped investment behavior. In...

This paper studies the role of the financial sector in affecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested...