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International Capital Flows and Development - Financial Openness Matters

Dennis Reinhardt (), Luca Ricci () and Thierry Tressel ()

No 11-2012, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional on various countries’ characteristics. The secondary datasets consist of respectively a series of repeated cross-sectional living conditions monitoring surveys (LCMSs). The LCMSs were collected in 1998 (baseline) and 2004 (follow-up), that is both prior, during and after the project implementation. Our aim is to assess the ability of the parametric and semi-parametric models as well as using a time- series of cross-sections to provide an adequate description of the logarithm of per adult equivalent consumption of rural household conditional on few covariates, including an infrastructure treatment dummy variable. Although, the mean cotton sales share of household income has more than doubled despite the fact that the mean distance to the input market remained unchanged from 1998 to 2004, the parametric and semi-parametric estimation results are only small and statistically insignificant in terms of gains to mean consumption emerged in the longer-term. The main results are robust to corrections for various sources of selection bias.

Keywords: Lucas paradox; capital flows; financial openness; economic development (search for similar items in EconPapers)
JEL-codes: F21 F36 O4 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2012-07
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Related works:
Journal Article: International capital flows and development: Financial openness matters (2013) Downloads
Working Paper: International capital flows and development: financial openness matters (2013) Downloads
Working Paper: International Capital Flows and Development; Financial Openness Matters (2010) Downloads
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