Financial Development and the Patterns of International Capital Flows
AbstractWe develop a tractable, two-country, overlapping-generations model and show that cross-country differences in financial development can explain three recent empirical patterns of international capital flows: Financial capital flows from relatively poor to relatively rich countries while foreign direct investment flows in the opposite direction; net capital flows go from poor to rich countries; despite its negative net international investment position, the US receives a positive net international investment income. We also explore the welfare and distributional effects of international capital flows and show that the direction of capital flows may change along the convergence process of a developing country. Matsuyama (Econometrica 2004) argues that, in the presence of credit market imperfections, financial market globalization may lead to a steady-state equilibrium in which fundamentally identical countries end up with different levels of per-capita output. We show that this symmetry-breaking property depends crucially on the assumption that investment operates on the extensive rather than the intensive margin.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7690.
Date of creation: Feb 2010
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Other versions of this item:
- Juergen von Hagen & Haiping Zhang, 2010. "Financial Development and the Patterns of International Capital Flows," Working Papers 02-2010, Singapore Management University, School of Economics.
- Jurgen von Hagen & Haiping Zhang, 2011. "Financial Development and the Patterns of International Capital Flows," Working Papers 21-2011, Singapore Management University, School of Economics.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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