Productivity Growth and Capital Flows: The Dynamics of Reforms

32 Pages Posted: 25 Aug 2009 Last revised: 22 Mar 2023

See all articles by Francisco J. Buera

Francisco J. Buera

Washington University in St. Louis; National Bureau of Economic Research (NBER)

Yongseok Shin

Washington University in St. Louis; Federal Reserve Banks - Federal Reserve Bank of St. Louis; National Bureau of Economic Research (NBER)

Date Written: August 2009

Abstract

Why doesn't capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP--the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.

Suggested Citation

Buera, Francisco J. and Shin, Yongseok, Productivity Growth and Capital Flows: The Dynamics of Reforms (August 2009). NBER Working Paper No. w15268, Available at SSRN: https://ssrn.com/abstract=1459569

Francisco J. Buera (Contact Author)

Washington University in St. Louis ( email )

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Campus Box 1208
Saint Louis, MO MO 63130-4899
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National Bureau of Economic Research (NBER)

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Yongseok Shin

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO 63130-4899
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States