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Productivity Growth and Capital Flows: The Dynamics of Reforms

Francisco J. Buera and Yongseok Shin

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 3, 147-85

Abstract: Why doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms.

JEL-codes: E21 E22 F21 F32 O16 O47 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20160307
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Working Paper: Productivity Growth and Capital Flows: The Dynamics of Reforms (2009) Downloads
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Handle: RePEc:aea:aejmac:v:9:y:2017:i:3:p:147-85