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)
August 31, 2011
Harvard Business School BGIE Unit Working Paper No. 12-009
We decompose capital flows – both debt and equity – into public and private components and study their relationship with productivity growth. This exercise reveals that international capital flows are mainly shaped by government decisions and sovereign to sovereign transactions. Specifically, we show: (i) international capital flows net of government debt are positively correlated with growth and allocated according to the neoclassical predictions; (ii) international capital flows net of official aid flows, which are mostly accounted as debt, are also positively correlated with productivity growth consistent with the predictions of the neoclassical model; (iii) public debt flows are negatively correlated with growth only if government debt is financed by another sovereign and not by private lenders. Our results show that the failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature.
Number of Pages in PDF File: 71
Keywords: current account, aid/government debt, reserves, puzzles of flows, productivity
JEL Classification: F21, F41, O1working papers series
Date posted: August 31, 2011
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