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Why Does Capital Flow to Rich States?

  • Sebnem Kalemli-Ozcan
  • Ariell Reshef
  • Bent Sorensen
  • Oved Yosha

The magnitude and the direction of net international capital flows does not fit neo-classical models. The 50 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 between the U.S. 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 and not due to inherent flaws in the neoclassical model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11301.

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Date of creation: May 2005
Date of revision:
Publication status: published as 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, October.
Handle: RePEc:nbr:nberwo:11301
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  1. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
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