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Why Does Capital Flow to Rich States?

  • Oved Yosha

    (deceased)

  • Bent E. Sorensen

    (University of Houston and CEPR)

  • Ariell Reshef

    (New York University)

  • Sebnem Kalemli-Ozcan

    (University of Houston and NBER)

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 Society for Economic Dynamics in its series 2007 Meeting Papers with number 828.

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Date of creation: 2007
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Handle: RePEc:red:sed007:828
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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