International Capital Flows and Aggregate Output
AbstractWe develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions.International flows of financial capital and foreign direct investment a ect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky.
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Bibliographic InfoPaper provided by Singapore Management University, School of Economics in its series Working Papers with number 10-2010.
Length: 36 pages
Date of creation: May 2010
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Other versions of this item:
- von Hagen, Jürgen & Zhang, Haiping, 2011. "International Capital Flows and Aggregate Output," CEPR Discussion Papers 8400, C.E.P.R. Discussion Papers.
- Jurgen von Hagen & Haiping Zhang, 2011. "International Capital Flows and Aggregate Output," Working Papers 20-2011, 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-CBA-2010-11-27 (Central Banking)
- NEP-DGE-2010-11-27 (Dynamic General Equilibrium)
- NEP-IFN-2010-11-27 (International Finance)
- NEP-MAC-2010-11-27 (Macroeconomics)
- NEP-OPM-2010-11-27 (Open Economy Macroeconomic)
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