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Financial Development and the Patterns of International Capital Flows

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  • Jurgen von Hagen

    ()
    (University of Bonn, Indiana University and CEPR)

  • Haiping Zhang

    ()
    (School of Economics, Singapore Management University)

Abstract

We 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 fl ows in the opposite direction; net capital flows go from poor to rich countries; despite of its negative net international investment positions, the United States receives a positive net investment income. We also explore the welfare and distributional effects of international capital fl ows and show that the patterns of capital fl ows may reverse along the convergence process of a developing country.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 21-2011.

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Length: 24 pages
Date of creation: Dec 2011
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Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:21-2011

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Keywords: Capital account liberalization; financial development; foreign direct investment; symmetry breaking;

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References

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  1. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  2. Juergen von Hagen & Haiping Zhang, 2010. "International Capital Flows and World Output Gains," Working Papers 01-2010, Singapore Management University, School of Economics.
  3. Diego Valderrama & Katherine Smith, 2009. "Why Do Emerging Economies Import Direct Investment and Export Savings? A Story of Financial Underdevelopment," 2009 Meeting Papers 1160, Society for Economic Dynamics.
  4. Matthew Higgins & Thomas Klitgaard & Cédric Tille, 2006. "Borrowing without debt? Understanding the U.S. international investment position," Staff Reports 271, Federal Reserve Bank of New York.
  5. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2009. "Capital Flows and Asset Prices," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 175-216 National Bureau of Economic Research, Inc.
  6. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2010. "Adjusting to Capital Account Liberalization," CEP Discussion Papers dp1014, Centre for Economic Performance, LSE.
  7. Devereux, Michael B. & Sutherland, Alan, 2009. "A portfolio model of capital flows to emerging markets," Journal of Development Economics, Elsevier, vol. 89(2), pages 181-193, July.
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Citations

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Cited by:
  1. Zhiwei XU & Yi Wen & pengfei Wang, 2013. "Two-Way Capital Flows and Global Imbalances: A Neoclassical Approach," 2013 Meeting Papers 406, Society for Economic Dynamics.
  2. Jürgen von Hagen & Haiping Zhang, 2014. "International Capital Flows in the Model with Limited Commitment and Incomplete Markets," Open Economies Review, Springer, vol. 25(1), pages 195-224, February.
  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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