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What Drives Long-term Capital Flows? A Theoretical and Empirical Investigation

  • Genevieve Verdier

What drives capital inflows in the long run? Do they follow the predictions of neoclassical theory, or are other forces at work? The purpose of this paper is to illustrate how long-term capital movements conform surprisingly well to the predictions of a simple neoclassical model with credit constraints. The most surprising prediction of this class of models is that, contrary to a pure neoclassical model, domestic savings should act as a complement rather than a substitute to capital inflows. Nevertheless, this class of models keeps the neoclassical prediction that, ceteris paribus, capital should flow to the countries where it is most scarce. Using data on net foreign liabilities over the 1970 to 1997 period, I find evidence that supports these predictions.

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Paper provided by EconWPA in its series Macroeconomics with number 0310011.

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Length: 50 pages
Date of creation: 14 Oct 2003
Date of revision: 14 Jul 2005
Handle: RePEc:wpa:wuwpma:0310011
Note: Type of Document - pdf; prepared on Win98; pages: 50; figures: 11
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