Journal Article

Capital Flows to Developing Countries: The Allocation Puzzle

Pierre-Olivier Gourinchas and Olivier Jeanne

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 4, pages 1484-1515
Published in print October 2013 | ISSN: 0034-6527
Published online February 2013 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdt004
Capital Flows to Developing Countries: The Allocation Puzzle

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  • Macroeconomic Aspects of International Trade and Finance
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The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more. We call this puzzle the “allocation puzzle”. Using a wedge analysis, we find that the pattern of capital flows is driven by national saving: the allocation puzzle is a saving puzzle. Further disaggregation of capital flows reveals that the allocation puzzle is also related to the pattern of accumulation of international reserves. The solution to the “allocation puzzle”, thus, lies at the nexus between growth, saving, and international reserve accumulation. We conclude with a discussion of some possible avenues for research.

Keywords: Capital flows; Productivity; Growth; F36; F43

Journal Article.  15260 words.  Illustrated.

Subjects: Macroeconomic Aspects of International Trade and Finance ; International Finance

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