Working Paper: NBER ID: w27371
Authors: Felipe Saffie; Liliana Varela; Keimu Yi
Abstract: We study empirically and theoretically the effects of international capital flows on resource allocation. Using the universe of firms in Hungary, we show that financial openness triggers input-cost and consumption channels, with the latter dominant and reallocating resources toward high expenditure elasticity activities in the short-run. A multi-sector heterogeneous firm trade model replicates these dynamics. In the long-run, the model predicts that resources will shift towards manufacturing exports to service debt. Owing to endogenous terms of trade dynamics, countries face a trade-off between the speed of convergence and their long-run capital stock; thus, financial openness can lead to welfare losses.
Keywords: international capital flows; resource allocation; financial liberalization; Hungary; micro and macro dynamics
JEL Codes: F15; F41; F43; F63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial openness (F30) | Input-cost channel (D26) |
| Financial openness (F30) | Consumption channel (D10) |
| Input-cost channel (D26) | Capital-intensive firms (D25) |
| Consumption channel (D10) | Demand for high expenditure elasticity goods (D12) |
| Capital elasticity (p25 to p75) (D24) | Value-added (D46) |
| Expenditure elasticity (p25 to p75) (D12) | Value-added (D46) |
| Foreign debt repayment (F34) | Increased exports (F10) |
| Increased exports (F10) | Reallocation towards manufacturing sectors (O14) |
| Expansion in high expenditure elasticity activities (E20) | Consumption channel (D10) |
| Financial liberalization (F30) | Changes in resource allocation (H19) |