Hagen, Jurgen von; Zhang, Haiping - East Asian Bureau of Economic Research (EABER) - 2007
We develop a general equilibrium model with nancial frictions in which internal capital (equity capital) and external … capital (bank loans) have different rates of return. Financial development raises the rate of return on external capital but … has a non-monotonic effect on the rate of return on internal capital. We then show in a two-country model that capital …