The Micro and Macro Dynamics of Capital Flows

Liliana Varela, Felipe Saffie and Kei-Mu Yi

No 14893, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study empirically and theoretically the effects of international capital flows on resource allocation. Using the universe of firms in Hungary, we show that financial openness triggers input-cost and consumption channels, with the latter dominant and reallocating resources toward high expenditure elasticity activities in the short run. A multi-sector heterogeneous firm trade model replicates these dynamics. In the long-run, the model predicts that resources will shift towards manufacturing exports to service debt. Owing to endogenous terms of trade dynamics, countries face a trade-off between the speed of convergence and their long-run capital stock; thus, financial openness can lead to welfare losses.

Keywords: Firm dynamics; Financial liberalization; Reallocation; Capital flows; Welfare; Non homothetic preferences (search for similar items in EconPapers)
JEL-codes: F15 F30 F41 F43 F63 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-fdg and nep-opm
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Citations: View citations in EconPapers (7)

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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)
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