Working Paper: CEPR ID: DP6561
Authors: Pierre-Olivier Gourinchas; Olivier Jeanne
Abstract: According to the consensus view in growth and development economics, cross country differences in per-capita income largely reflect differences in countries' total factor productivity. We argue that this view has powerful implications for patterns of capital flows: everything else equal, countries with faster productivity growth should invest more, and attract more foreign capital. We then show that the pattern of net capital flows across developing countries is not consistent with this prediction. If anything, capital seems to flow more to countries that invest and grow less. We argue that this result - which we call the allocation puzzle - constitutes an important challenge for economic research, and discuss some possible research avenues to solve the puzzle.
Keywords: capital flows; Lucas puzzle
JEL Codes: F21; F36; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher productivity growth (O49) | Increased capital inflows (F32) |
| Lower productivity growth (O49) | Increased capital inflows (F32) |
| Higher productivity growth (O49) | Lower capital inflows (F32) |