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Why does not capital frlow from rich to poor countries? An Empirical investigation

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  • Laura Alfaro
  • Sebnem Kalemli-Ozcan

Abstract

We examine the role of different explanations for the lack of flows of capital from rich to poor countries---the Lucas paradox---in an empirical framework. Broadly speaking, the theoretical explanations for this paradox include differences in fundamentals affecting the production structure versus international capital market imperfections. Our cross-country regressions show that, for the period 1971$-$1998, institutional quality is the most important causal variable explaining the Lucas paradox. Human capital and asymmetric information play a role as determinants of capital inflows but these variables cannot fully account for the paradox

Suggested Citation

  • Laura Alfaro & Sebnem Kalemli-Ozcan, 2004. "Why does not capital frlow from rich to poor countries? An Empirical investigation," Econometric Society 2004 North American Summer Meetings 416, Econometric Society.
  • Handle: RePEc:ecm:nasm04:416
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    Cited by:

    1. Mehmet Fatih Ekinci & Şebnem Kalemli-Özcan & Bent E. Sørensen, 2009. "Financial Integration within EU Countries: The Role of Institutions, Confidence and Trust," NBER Chapters,in: NBER International Seminar on Macroeconomics 2007, pages 325-391 National Bureau of Economic Research, Inc.
    2. Prabir De, 2010. "Does Governance Matter for Enhancing Trade? Empirical Evidence from Asia," Governance Working Papers 22792, East Asian Bureau of Economic Research.
    3. Prabir De, 2010. "Governance, Institutions, and Regional Infrastructure in Asia," Governance Working Papers 22878, East Asian Bureau of Economic Research.

    More about this item

    Keywords

    capital flows; Lucas paradox; fundamentals; market imperfections;

    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
    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy

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