International Capital Flows and Development: Financial Openness Matters

49 Pages Posted: 17 Jun 2013

See all articles by Dennis Reinhardt

Dennis Reinhardt

Bank of England

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 13, 2013

Abstract

Does capital flow from rich to poor countries? We revisit the Lucas paradox and ask whether it results from a lack of capital account openness. We find that, when accounting for such openness, the prediction of neoclassical theory is empirically confirmed: among financially open economies, less-developed countries tend to experience net capital inflows and more-developed countries tend to experience net capital outflows. These results also hold when taking into account private flows, institutions, and numerous controls. We also show that reserve intervention has an effect on the current account only in financially open economies.

Keywords: Lucas paradox, capital flows, financial openness, economic development

JEL Classification: F21, F36, O4

Suggested Citation

Reinhardt, Dennis and Ricci, Luca Antonio and Tressel, Thierry, International Capital Flows and Development: Financial Openness Matters (June 13, 2013). Bank of England Working Paper No. 472. Available at SSRN: https://ssrn.com/abstract=2280307 or http://dx.doi.org/10.2139/ssrn.2280307

Dennis Reinhardt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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