Capital Flows to Developing Countries: Is There an Allocation Puzzle?

Josef Schroth

Staff Working Papers from Bank of Canada

Abstract: Foreign direct investment inflows are positively related to growth across developing countries—but so are savings in excess of investment. I develop an explanation for this well-established puzzle by focusing on the limited availability of consumer credit in developing countries together with general equilibrium effects. In my model, fast-growing developing countries increase their holdings of safe assets, which creates net capital outflows despite inflows of foreign direct investment. The world risk-free interest rate falls as a result, and slow-growing developing countries reduce their holdings of safe assets, which creates net capital inflows despite outflows of foreign direct investment.

Keywords: Foreign reserves management; Interest rates; International financial markets (search for similar items in EconPapers)
JEL-codes: E13 E21 F43 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2016/11/swp2016-53.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-53

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().