Financial Development and International Capital Flows

We develop a general equilibrium model with nancial frictions in which internal capital (equity capital) and external capital (bank loans) have di erent rates of return. Financial development raises the rate of return on external capital but has a non-monotonic e ect on the rate of return on interna...

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Main Authors: von Hagen, Jürgen, ZHANG, Haiping
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Language:English
Published: Institutional Knowledge at Singapore Management University 2007
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Online Access:https://ink.library.smu.edu.sg/soe_research/1025
https://ink.library.smu.edu.sg/context/soe_research/article/2024/viewcontent/FinDevCapFlow.pdf
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spelling sg-smu-ink.soe_research-20242022-03-21T09:08:10Z Financial Development and International Capital Flows von Hagen, Jürgen ZHANG, Haiping We develop a general equilibrium model with nancial frictions in which internal capital (equity capital) and external capital (bank loans) have di erent rates of return. Financial development raises the rate of return on external capital but has a non-monotonic e ect on the rate of return on internal capital. We then show in a two-country model that capital account liberalization leads to out ow of nancial capital from the country with less developed nancial system. However, the direction of foreign direct investment (FDI, henceforth) depends on the exact degrees of nancial development in the two countries as well as the speci c capital controls policy. Our model helps explain the Lucas Paradox (Lucas, 1990). Countries with least developed nancial system have the out ows of both nancial capital and FDI; countries with most developed nancial system witness two-way capital ows, i.e., the in ow of nancial capital and the out ow of FDI; countries with intermediate level of nancial development have the out ow of nancial capital and the in ow of FDI. It is consistent with the fact that FDI ows not to the poorest countries but to the middle-income countries. 2007-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/1025 https://ink.library.smu.edu.sg/context/soe_research/article/2024/viewcontent/FinDevCapFlow.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Capital account liberalization Financial frictions Interest-elastic saving Economics
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Capital account liberalization
Financial frictions
Interest-elastic saving
Economics
spellingShingle Capital account liberalization
Financial frictions
Interest-elastic saving
Economics
von Hagen, Jürgen
ZHANG, Haiping
Financial Development and International Capital Flows
description We develop a general equilibrium model with nancial frictions in which internal capital (equity capital) and external capital (bank loans) have di erent rates of return. Financial development raises the rate of return on external capital but has a non-monotonic e ect on the rate of return on internal capital. We then show in a two-country model that capital account liberalization leads to out ow of nancial capital from the country with less developed nancial system. However, the direction of foreign direct investment (FDI, henceforth) depends on the exact degrees of nancial development in the two countries as well as the speci c capital controls policy. Our model helps explain the Lucas Paradox (Lucas, 1990). Countries with least developed nancial system have the out ows of both nancial capital and FDI; countries with most developed nancial system witness two-way capital ows, i.e., the in ow of nancial capital and the out ow of FDI; countries with intermediate level of nancial development have the out ow of nancial capital and the in ow of FDI. It is consistent with the fact that FDI ows not to the poorest countries but to the middle-income countries.
format text
author von Hagen, Jürgen
ZHANG, Haiping
author_facet von Hagen, Jürgen
ZHANG, Haiping
author_sort von Hagen, Jürgen
title Financial Development and International Capital Flows
title_short Financial Development and International Capital Flows
title_full Financial Development and International Capital Flows
title_fullStr Financial Development and International Capital Flows
title_full_unstemmed Financial Development and International Capital Flows
title_sort financial development and international capital flows
publisher Institutional Knowledge at Singapore Management University
publishDate 2007
url https://ink.library.smu.edu.sg/soe_research/1025
https://ink.library.smu.edu.sg/context/soe_research/article/2024/viewcontent/FinDevCapFlow.pdf
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