International Capital Flows and Aggregate Output
We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the les...
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sg-smu-ink.soe_research-22302019-04-21T01:36:49Z International Capital Flows and Aggregate Output von Hagen, Jurgen ZHANG, Haiping We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions. International flows of financial capital and foreign direct investment affect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky. 2010-10-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/1231 https://ink.library.smu.edu.sg/context/soe_research/article/2230/viewcontent/ICF_AO_new.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 financial development foreign direct investment world output gains Finance International Economics |
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We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions. International flows of financial capital and foreign direct investment affect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky. |
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von Hagen, Jurgen ZHANG, Haiping |
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von Hagen, Jurgen ZHANG, Haiping |
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von Hagen, Jurgen |
title |
International Capital Flows and Aggregate Output |
title_short |
International Capital Flows and Aggregate Output |
title_full |
International Capital Flows and Aggregate Output |
title_fullStr |
International Capital Flows and Aggregate Output |
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International Capital Flows and Aggregate Output |
title_sort |
international capital flows and aggregate output |
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Institutional Knowledge at Singapore Management University |
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2010 |
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https://ink.library.smu.edu.sg/soe_research/1231 https://ink.library.smu.edu.sg/context/soe_research/article/2230/viewcontent/ICF_AO_new.pdf |
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