Productivity Growth and Capital Flows: The Dynamics of Reforms
American Economic Journal: Macroeconomics
vol. 9,
no. 3, July 2017
(pp. 147-85)
Abstract
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.Citation
Buera, Francisco J., and Yongseok Shin. 2017. "Productivity Growth and Capital Flows: The Dynamics of Reforms." American Economic Journal: Macroeconomics, 9 (3): 147-85. DOI: 10.1257/mac.20160307Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E22 Investment; Capital; Intangible Capital; Capacity
- F21 International Investment; Long-term Capital Movements
- F32 Current Account Adjustment; Short-term Capital Movements
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O47 Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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