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International Capital Flows and Development: Financial Openness Matters

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  • Mr. Luca A Ricci
  • Mr. Thierry Tressel
  • Dennis B. S. Reinhardt

Abstract

Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional of various countries’ characteristics. The findings are driven by foreign direct investment, portfolio equity investment, and to some extent by loans to the private sector.

Suggested Citation

  • Mr. Luca A Ricci & Mr. Thierry Tressel & Dennis B. S. Reinhardt, 2010. "International Capital Flows and Development: Financial Openness Matters," IMF Working Papers 2010/235, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/235
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    More about this item

    Keywords

    WP; net capital capital inflow; income country; GDP ratio; foreign direct investment; country coefficient; Lucas paradox; capital flows; financial openness; economic development; portfolio equity investment; net capital inflow; low income; investment vis-à-vis; net capital outflow; Capital account; Current account; Capital inflows; Personal income; Global;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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