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International Capital Flows and World Output Gains

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  • Jürgen von Hagen

    (University of Bonn, Indiana University, CEPR)

Abstract

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.

Suggested Citation

  • Jürgen von Hagen, 2009. "International Capital Flows and World Output Gains," 2009 Meeting Papers 311, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:311
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    References listed on IDEAS

    as
    1. van Wincoop, Eric & Tille, Cédric, 2008. "International Capital Flows under Dispersed Information: Theory and Evidence," CEPR Discussion Papers 6989, C.E.P.R. Discussion Papers.
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    Cited by:

    1. von Hagen, Jurgen & Zhang, Haiping, 2010. "Financial Development and the Patterns of International Capital Flows," CEPR Discussion Papers 7690, C.E.P.R. Discussion Papers.
    2. Salike, Nimesh, 2010. "Effect of regional integration agreement on foreign direct investment : A theoretical perspective," MPRA Paper 31859, University Library of Munich, Germany.
    3. von Hagen, Jürgen & Zhang, Haiping, 2014. "Financial development, international capital flows, and aggregate output," Journal of Development Economics, Elsevier, vol. 106(C), pages 66-77.

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    More about this item

    JEL classification:

    • 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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