Working Paper: NBER ID: w21744
Authors: Lee E. Ohanian; Paulina Restrepo-Echavarria; Mark L. J. Wright
Abstract: Since 1950, the economies of East Asia grew rapidly but received little inter-national capital, while Latin America received considerable international capitaleven as their economies stagnated. The literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections. This paper proposes a broader thesis that country-specificdistortions, such as domestic labor and capital market distortions, also impactcapital flows. We develop a DSGE model of Asia, Latin America, and the Rest ofthe World that features an open-economy business cycle accounting framework tomeasure these domestic and international distortions, and to quantify their con-tributions to international capital flows. We find that domestic distortions havebeen the predominant drivers of international capital flows, and that the generalequilibrium effects of these distortions are very large. International capital market distortions also matter, but less.
Keywords: International capital flows; Domestic distortions; Labor market; Capital market; DSGE model
JEL Codes: F21; F32; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic labor market distortions (J79) | Reduce the return to capital investment in East Asia (F21) |
| Domestic labor market distortions (J79) | Limit capital inflows (F32) |
| Domestic labor market distortions (J79) | Explain 16% of Asian capital flows (F32) |
| Domestic labor market distortions (J79) | Explain 40% of Latin American capital flows (F21) |
| Domestic capital market distortions (G19) | Impact on capital flows (F32) |
| International capital market distortions (F32) | Encourage borrowing in Asia (F65) |
| Domestic factors (F52) | Drive historical pattern of capital flows (F32) |