Capital Flows to Developing Countries: Is There an Allocation Puzzle?
Staff Working Papers from Bank of Canada
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
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-53
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