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Lucas Paradox in The Long Run

Bilal Keskinsoy ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates international capital flows to developing countries for the period 1970-2006. The study focuses on the empirical puzzle that although one would expect international capital to flow to capital scarce countries where returns are higher, observation shows that capital flows to richer rather than to poorer countries (the Lucas paradox). To explore this, total capital is measured as the sum of foreign direct investment and portfolio equity flows. The paper addresses the argument, based on cross-section evidence (Alfaro et al., 2008, Rev. Econ. Stats), that including the quality of institutions accounts for the paradox (because richer countries have better institutions they attract more capital) and finds that this only holds if developed countries are included; within developing countries, institutions do not account for the paradox. Hence, for a consistent sample of 47 developing countries the positive wealth bias in international capital flows or the Lucas paradox is shown to be a persistent phenomenon in the long run.

Keywords: Capital flows; Lucas paradox; Institutional quality; Economic growth; Cross-section OLS (search for similar items in EconPapers)
JEL-codes: E02 F41 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his and nep-opm
Date: 2017-02-22
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