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Productivity Growth and Capital Flows: The Dynamics of Reforms

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Author Info
Francisco J. Buera
Yongseok Shin
Abstract

Why doesn’t capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP—the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15268.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15268

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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