Why doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms.
Buera, Francisco J., and Yongseok Shin.
"Productivity Growth and Capital Flows: The Dynamics of Reforms."
American Economic Journal: Macroeconomics,
Macroeconomics: Consumption; Saving; Wealth
Investment; Capital; Intangible Capital; Capacity
International Investment; Long-term Capital Movements
Current Account Adjustment; Short-term Capital Movements
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence