Productivity Growth and Capital Flows: The Dynamics of Reforms

Francisco Buera and Yongseok Shin

No 15268, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Why doesn't capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP--the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.

JEL-codes: E44 F21 F32 F43 O16 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-eff, nep-fdg, nep-mac and nep-opm
Note: EFG IFM
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Citations: View citations in EconPapers (57)

Published as Francisco J. Buera & Yongseok Shin, 2017. "Productivity Growth and Capital Flows: The Dynamics of Reforms," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 147-185, July.

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