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What Drives Long-term Capital Flows? A Theoretical and Empirical Investigation

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  • Genevieve Verdier

Abstract

What drives capital inflows in the long run? Do they follow the predictions of neoclassical theory, or are other forces at work? The purpose of this paper is to illustrate how long-term capital movements conform surprisingly well to the predictions of a simple neoclassical model with credit constraints. The most surprising prediction of this class of models is that, contrary to a pure neoclassical model, domestic savings should act as a complement rather than a substitute to capital inflows. Nevertheless, this class of models keeps the neoclassical prediction that, ceteris paribus, capital should flow to the countries where it is most scarce. Using data on net foreign liabilities over the 1970 to 1997 period, I find evidence that supports these predictions.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0310011.

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Length: 50 pages
Date of creation: 14 Oct 2003
Date of revision: 14 Jul 2005
Handle: RePEc:wpa:wuwpma:0310011

Note: Type of Document - pdf; prepared on Win98; pages: 50; figures: 11
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Web page: http://128.118.178.162

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Keywords: credit constraints; net external debt; capital flows; savings; convergence;

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References

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Citations

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Cited by:
  1. Luca Antonio Ricci & Thierry Tressel & Dennis B. S. Reinhardt, 2010. "International Capital Flows and Development: Financial Openness Matters," IMF Working Papers 10/235, International Monetary Fund.
  2. Ding, Ding & Jinjarak, Yothin, 2012. "Development threshold, capital flows, and financial turbulence," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 365-385.
  3. João Sousa Andrade, 2007. "La these de Feldstein-Horioka: une mesure de la mobilité internationale du capital," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(1), pages 53-67, March.
  4. Fernando Arias & Daira Garrido & Daniel Parra & Hernán Rincón, 2012. "¿Responden los diferentes tipos de flujos de capitales a los mismos fundamentos y en el mismo grado? Evidencia reciente para países emergentes," BORRADORES DE ECONOMIA 009764, BANCO DE LA REPÚBLICA.
  5. Abdul Karim, Zulkefly & Zaidi, Mohd Azlan Shah & Ismail, Mohd Adib & Abdul Karim, Bakri, 2011. "Institutions and foreign direct investment (FDI) in Malaysia: empirical evidence using ARDL model," MPRA Paper 31899, University Library of Munich, Germany.
  6. Lipschitz, Leslie & Rochon, Céline & Verdier, Geneviève, 2011. "A real model of transitional growth and competitiveness in China," Journal of Asian Economics, Elsevier, vol. 22(4), pages 267-283, August.

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