A Solution to Two Paradoxes of International Capital Flows

July 1, 2006

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Format: Chicago

Shang-Jin Wei, and Jiandong Ju. A Solution to Two Paradoxes of International Capital Flows, (USA: International Monetary Fund, 2006) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

International capital flows from rich to poor countries can be regarded as either too low (the Lucas paradox in a one-sector model) or too high (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neoclassical model which features financial contracts and firm heterogeneity. In our model, free patterns of gross capital flow emerge as a function of the quality of the financial system and the level of protection for property rights(i.e., the risk of expropriation. A poor country with an inefficient financial system but a low expropriation risk may simultaneously experience an outflow of financial capital but an inflow of foreign direct investment (FDI), resulting in a small net flow.

Subject: Capital flows, Foreign direct investment, Self-employment, Trade in goods, Trade liberalization

Keywords: Financial system, Interest rate, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/178
Stock No:

WPIEA2006178
ISBN:

9781451864380
ISSN:

1018-5941

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