International Capital Flows and World Output Gains

Juergen von Hagen and Haiping Zhang ()

No 01-2010, Working Papers from Singapore Management University, School of Economics

Abstract: We develop a two-country overlapping-generations model with domestic financial frictions and show that cross-country differences in financial development explain three recent patterns of international capital flows. In our model, domestic financial frictions distort the interest rates and production efficiency in the less financially developed country. Capital flows not only lead to cross-country resource reallocation, but also trigger within-country resource reallocation among firms. From the efficiency perspective, full capital mobility raises the world output higher than under international financial autarky. If the mobility of either financial capital or foreign direct investment is restricted, the world output may be lower.

Keywords: Capital account liberalization; financial frictions; financial development; foreign direct investment; world output gains (search for similar items in EconPapers)
JEL-codes: E44 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in SMU Economics and Statistics Working Paper Series

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Working Paper: International Capital Flows and World Output Gains (2009)
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