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Domestic Savings and Foreign Capital: the Complementarity Channel

  • Kharroubi, E.

Recent empirical work has shown that current account deficits have been associated with lower growth in developing countries while they have been associated with higher growth in developed countries. This paper shows that this can be rationalized in an environment where firms face (i) transaction costs on the capital market and (ii) complementarity between domestic and foreign sources of capital. In this case, larger current account deficits are associated with lower investment and lower growth. However, the positive relationship between current account balance and growth is dampened with lower transaction costs and eventually gets reversed.

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File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/ner212.pdf
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Paper provided by Banque de France in its series Working papers with number 212.

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Length: 34 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bfr:banfra:212
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  1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  2. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  3. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series qt7g18546z, Department of Economics, UC Santa Cruz.
  4. Philippe Aghion & Diego Comin & Peter Howitt, 2006. "When Does Domestic Saving Matter for Economic Growth?," DEGIT Conference Papers c011_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  6. Maurice Obstfeld, 2000. "The Global Capital Market: Benefactor or Menace?," International Finance 0004001, EconWPA.
  7. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  8. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
  9. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
  10. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
  11. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Does Financial Liberalization Spur Growth?," Working Paper Research 53, National Bank of Belgium.
  12. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  13. Atif Mian, 2006. "Distance Constraints: The Limits of Foreign Lending in Poor Economies," Journal of Finance, American Finance Association, vol. 61(3), pages 1465-1505, 06.
  14. Pierre-Olivier Gourinchas & Olivier Jeanne, 2003. "The Elusive Gains from International Financial Integration," NBER Working Papers 9684, National Bureau of Economic Research, Inc.
  15. Broner, Fernando A & Ventura, Jaume, 2006. "Globalization and Risk Sharing," CEPR Discussion Papers 5820, C.E.P.R. Discussion Papers.
  16. Obstfeld,Maurice & Taylor,Alan M., 2004. "Global Capital Markets," Cambridge Books, Cambridge University Press, number 9780521633178.
  17. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
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