International Capital Flows and World Output Gains
We develop a two-country overlapping-generations model in which international capital flows mitigate two distinct distortions of financial frictions. Cross-country differences in financial development explain two recent empirical puzzles: first, financial capital flows from poor to rich countries and FDI flows in the opposite direction simultaneously; second, net capital flows are ``uphill'' from poor to rich countries. In contrast to earlier papers in this area (Matsuyama, 2004, Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations, Econometrica, and von Hagen and Zhang, 2009, Financial Development and Patterns of International Capital Flows), we show that, with a more general setup of the production side of the economies, perfect capital mobility is efficiency-enhancing in the sense that it unambiguously increases world output. However, if the mobility of either financial capital or foreign direct investment is restricted, capital flows may or may not generate world output gains, depending on the levels of financial development in the two countries.
Year of publication: |
2009
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Authors: | Hagen, Jürgen von |
Institutions: | Society for Economic Dynamics - SED |
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