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American Economic Review: Vol. 102 No. 5 (August 2012)

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Industrial Structure and Capital Flows

Article Citation

Jin, Keyu. 2012. "Industrial Structure and Capital Flows." American Economic Review, 102(5): 2111-46.

DOI: 10.1257/aer.102.5.2111

Abstract

This paper provides a new theory of international capital flows. In a framework that integrates factor-proportions-based trade and financial capital flows, a novel force emerges: capital tends to flow toward countries that become more specialized in capital-intensive industries. This "composition" effect competes with the standard force that channels capital toward the location where it is scarcer. If the composition effect dominates, capital flows away from the country hit by a positive labor force/productivity shock—a flow "reversal." Extended to a quantitative framework, the model generates sizable current account imbalances between developing and developed countries broadly consistent with the data. (JEL F14, F21, F32, F41, L16, O19)

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Authors

Jin, Keyu (London School of Economics and Political Science)

JEL Classifications

F14: Country and Industry Studies of Trade
F21: International Investment; Long-term Capital Movements
F32: Current Account Adjustment; Short-term Capital Movements
F41: Open Economy Macroeconomics
L16: Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
O19: International Linkages to Development; Role of International Organizations


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