Domestic Savings and Foreign Capital: the Complementarity Channel

E. Kharroubi

Documents de Travail from Banque de France

Abstract: Recent empirical work has shown that current account deficits have been associated with lower growth in developing countries while they have been associated with higher growth in developed countries. This paper shows that this can be rationalized in an environment where firms face (i) transaction costs on the capital market and (ii) complementarity between domestic and foreign sources of capital. In this case, larger current account deficits are associated with lower investment and lower growth. However, the positive relationship between current account balance and growth is dampened with lower transaction costs and eventually gets reversed.

Keywords: Financial Integration; Borrowing Constraint; Growth; Domestic Savings. (search for similar items in EconPapers)
JEL-codes: D82 E44 F36 G15 G21 O16 (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:bfr:banfra:212

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