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Financial Development and the Patterns of International Capital Flows

Author

Listed:
  • Jurgen von Hagen

    () (University of Bonn, Indiana University and CEPR)

  • Haiping Zhang

    () (School of Economics, Singapore Management University)

Abstract

We develop a tractable two-country overlapping-generations model and show that cross-country differences in financial development can explain three recent empirical patterns of international capital flows: Financial capital flows from relatively poor to relatively rich countries while foreign direct investment fl ows in the opposite direction; net capital flows go from poor to rich countries; despite of its negative net international investment positions, the United States receives a positive net investment income. We also explore the welfare and distributional effects of international capital fl ows and show that the patterns of capital fl ows may reverse along the convergence process of a developing country.

Suggested Citation

  • Jurgen von Hagen & Haiping Zhang, 2011. "Financial Development and the Patterns of International Capital Flows," Working Papers 21-2011, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:21-2011
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    References listed on IDEAS

    as
    1. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, June.
    2. Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2010. "Adjusting to Capital Account Liberalization," CEPR Discussion Papers 8087, C.E.P.R. Discussion Papers.
    3. Diego Valderrama & Katherine Smith, 2009. "Why Do Emerging Economies Import Direct Investment and Export Savings? A Story of Financial Underdevelopment," 2009 Meeting Papers 1160, Society for Economic Dynamics.
    4. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2009. "Capital Flows and Asset Prices," NBER Chapters,in: NBER International Seminar on Macroeconomics 2007, pages 175-216 National Bureau of Economic Research, Inc.
    5. Jürgen von Hagen, 2009. "International Capital Flows and World Output Gains," 2009 Meeting Papers 311, Society for Economic Dynamics.
    6. Devereux, Michael B. & Sutherland, Alan, 2009. "A portfolio model of capital flows to emerging markets," Journal of Development Economics, Elsevier, vol. 89(2), pages 181-193, July.
    7. Matthew Higgins & Thomas Klitgaard & Cédric Tille, 2006. "Borrowing without debt? Understanding the U.S. international investment position," Staff Reports 271, Federal Reserve Bank of New York.
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    Citations

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    Cited by:

    1. Jürgen von Hagen & Haiping Zhang, 2014. "International Capital Flows in the Model with Limited Commitment and Incomplete Markets," Open Economies Review, Springer, vol. 25(1), pages 195-224, February.
    2. Pengfei Wang & Yi Wen & Zhiwei Xu, 2012. "Two-way capital flows and global imbalances: a neoclassical approach," Working Papers 2012-016, Federal Reserve Bank of St. Louis.
    3. von Hagen, Jürgen & Zhang, Haiping, 2014. "Financial development, international capital flows, and aggregate output," Journal of Development Economics, Elsevier, vol. 106(C), pages 66-77.

    More about this item

    Keywords

    Capital account liberalization; financial development; foreign direct investment; symmetry breaking;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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