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International capital flows and development: Financial openness matters

  • Reinhardt, Dennis
  • Ricci, Luca Antonio
  • Tressel, Thierry

Does capital flow from rich to poor countries? We revisit the Lucas paradox to account for the role of capital account openness. We find that, when accounting for such openness, the prediction of the neoclassical theory is empirically confirmed: among financially open economies, less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows. The results hold also when taking into account private flows, institutions, and numerous controls. We also show that reserve intervention has an effect on the current account only in financially open economies.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 91 (2013)
Issue (Month): 2 ()
Pages: 235-251

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Handle: RePEc:eee:inecon:v:91:y:2013:i:2:p:235-251
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