Capital Flows to Developing Countries: The Allocation Puzzle

Pierre-Olivier Gourinchas and Olivier Jeanne

No WP09-12, Working Paper Series from Peterson Institute for International Economics

Abstract: The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital seems to flow more to countries that invest and grow less. We then introduce wedges into the neoclassical growth model and find that one needs a saving wedge in order to explain the correlation between growth and capital flows observed in the data. We conclude with a discussion of some possible avenues for research to resolve the contradiction between the model predictions and the data.

Keywords: Capital Flows; Productivity; Growth (search for similar items in EconPapers)
JEL-codes: F36 F43 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-dev, nep-fdg and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Capital Flows to Developing Countries: The Allocation Puzzle (2013)
Working Paper: Capital Flows to Developing Countries: The Allocation Puzzle (2007)
Working Paper: Capital Flows to Developing Countries: The Allocation Puzzle (2007)
Working Paper: Capital Flows to Developing Countries: the Allocation Puzzle (2005)
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