The Capital Matthew Effect: Directed Technical Change and International Capital Flows
98 Pages Posted: 11 Jun 2019 Last revised: 11 Apr 2022
Date Written: April 13, 2019
This study shows that technological specialization is the primary driver of long-term international capital flows. The underlying mechanism comprises the two faces of capital scarcity: although a shortage of capital currently generates a higher marginal product, it also makes a country inclined toward capital-saving technology. Therefore, in equilibrium, the rate of capital returns is jointly determined by a convergence effect from diminishing return and an opposing divergence effect from directed technological change. Initially capital-rich countries favor capital-complements-biased technology and continuously import capital from capital-poor countries that develop capital-substitutes-biased technology. We name this anti-convergence force on capital allocation the capital Matthew effect. This new perspective can help rationalize many related international finance puzzles, including the Lucas paradox, global imbalance, and allocation puzzle.
Keywords: directed technical change; international capital flows; Lucas puzzle; global imbalance; allocation puzzle; Matthew effect
JEL Classification: F20; F30; F63; G15; O33; P16
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