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Why Does Capital Flow to Rich States?

Author

Listed:
  • Sebnem Kalemli-Ozcan

    (University of Houston and NBER)

  • Ariell Reshef

    (University of Virginia)

  • Bent E Sørensen

    (University of Houston and CEPR)

  • Oved Yosha

    (Tel Aviv University)

Abstract

The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows among the states are consistent with the model. Therefore, the small size and "wrong" direction of net international capital flows are likely due to frictions associated with national borders, not to inherent flaws in the neoclassical model. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Sebnem Kalemli-Ozcan & Ariell Reshef & Bent E Sørensen & Oved Yosha, 2010. "Why Does Capital Flow to Rich States?," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 769-783, November.
    • Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:769-783
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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