Sovereigns, Upstream Capital Flows and Global Imbalances
Harvard University - Business, Government and the International Economy Unit
University of Maryland
Erasmus University Rotterdam (EUR); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)
March 25, 2014
Harvard Business School BGIE Unit Working Paper No. 12-009
We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find i) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries’ productivity growth, ii) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign, iii) net public debt financed by private creditors is positively correlated with growth, iv) public savings are strongly positively correlated with growth, whereas correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.
Number of Pages in PDF File: 52
Keywords: current account, aid/government debt, reserves, productivity
JEL Classification: F21, F41, O1
Date posted: August 31, 2011 ; Last revised: March 27, 2014
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