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The Micro and Macro Dynamics of Capital Flows

Author

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  • Felipe Saffie

    (University of Virginia Darden)

  • Liliana Varela

    (London School of Economics (LSE)
    Centre for Economic Policy Research (CEPR))

  • Kei-Mu Yi

    (Federal Reserve Bank of Dallas
    University of Houston
    National Bureau of Economic Research (NBER))

Abstract

We study empirically and theoretically the effects of international capital flows on resource allocation. Using the universe of firms in Hungary, we show that financial openness triggers input-cost and consumption channels, with the latter dominant and reallocating resources toward high expenditure elasticity activities in the short-run. A multi-sector heterogeneous firm trade model replicates these dynamics. In the long-run, the model predicts that resources will shift towards manufacturing exports to service debt. Owing to endogenous terms of trade dynamics, countries face a trade-off between the speed of convergence and their long-run capital stock; thus, financial openness can lead to welfare losses.

Suggested Citation

  • Felipe Saffie & Liliana Varela & Kei-Mu Yi, 2021. "The Micro and Macro Dynamics of Capital Flows," Discussion Papers 2121, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2121
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    3. Li, Xiang & Su, Dan, 2022. "Total factor productivity growth at the firm-level: The effects of capital account liberalization," Journal of International Economics, Elsevier, vol. 139(C).
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    6. Suah, Jing Lian, 2020. "Uncertainty and Exchange Rates: Global Dynamics (Well, I Don't Quite Know Anymore)," MPRA Paper 109087, University Library of Munich, Germany.
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    More about this item

    Keywords

    firm dynamics; financial liberalization; reallocation; capital flows; welfare; non-homothetic preferences;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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