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American Economic Journal: Economic Policy: Vol. 2 No. 4 (November 2010)

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Domestic Institutions and the Bypass Effect of Financial Globalization

Article Citation

Ju, Jiandong, and Shang-Jin Wei. 2010. "Domestic Institutions and the Bypass Effect of Financial Globalization." American Economic Journal: Economic Policy, 2(4): 173-204.

DOI: 10.1257/pol.2.4.173

Abstract

This paper proposes a simple model to study how domestic institutions affect patterns of international capital flows. Inefficient financial system, and poor corporate governance, may be bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward FDI. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector or poor corporate governance. Interestingly, financial and property rights institutions can have opposite effects on capital flows. (JEL D02, E21, F21, F32, G34)

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Authors

Ju, Jiandong (U OK and Tsinghua U)
Wei, Shang-Jin (Columbia U)

JEL Classifications

D02: Institutions: Design, Formation, and Operations
E21: Macroeconomics: Consumption; Saving; Wealth
F21: International Investment; Long-term Capital Movements
F32: Current Account Adjustment; Short-term Capital Movements
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance

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