The Micro and Macro Dynamics of Capital Flows

Felipe Saffie, Liliana Varela () and Kei-Mu Yi

No 2527, Working Papers from Federal Reserve Bank of Dallas

Abstract: We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness.

Keywords: firm dynamics; financial liberalization; reallocation; capital flows; TFP; non-homothetic preferences (search for similar items in EconPapers)
JEL-codes: F15 F41 F43 F63 (search for similar items in EconPapers)
Pages: 104
Date: 2025-08-01
New Economics Papers: this item is included in nep-fdg and nep-mon
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Related works:
Working Paper: The Micro and Macro Dynamics of Capital Flows (2021)
Working Paper: The Micro and Macro Dynamics of Capital Flows (2020)
Working Paper: The Micro and Macro Dynamics of Capital Flows (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:101404

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DOI: 10.24149/wp2527

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