Working Paper: CEPR ID: DP8400
Authors: Jürgen von Hagen; Haiping Zhang
Abstract: We show in a tractable, multi-country OLG model that cross-country differences in financial development explain three recent empirical patterns of international capital flows. International capital mobility affects output in each country directly through the size of domestic investment as well as indirectly through the composition of domestic investment and the level of domestic savings. In contrast to earlier literature, our model admits the possibility that the indirect effects dominate the direct effects and international capital mobility raises output in the poor country and globally, although net capital flows are in the direction of the rich country. Our model adds to the understanding of the benefits of international capital mobility in the presence of financial frictions.
Keywords: capital market imperfections; financial development; financial frictions; foreign direct investment; international capital movements
JEL Codes: E44; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International capital mobility (F21) | better returns on savings in less financially developed countries (O16) |
| better returns on savings in less financially developed countries (O16) | increased savings (D14) |
| increased savings (D14) | domestic investment (E22) |
| International capital mobility (F21) | reallocation of investment towards more productive sectors (E22) |
| reallocation of investment towards more productive sectors (E22) | increase in output in poorer countries (F63) |
| International capital mobility (F21) | increase in world output (F62) |