The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude towards innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labour market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the short- and long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, heterogeneity helps to explain the differences in macro quantities and equity returns observed in the international data.
International Journal of Finance & Economics, Vol. 27, Issue4, Special Issue: Essays in Modelling Financial Market Dynamics: An Overview, pp.3805-3831, 2022