Summary of WP/92/111
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/111

“Robustness of Macroeconomic Indicators of Capital Mobility” by Enrique Mendoza

This paper examines the performance of several well-known macroeconomic indicators of capital mobility in an intertemporal equilibrium framework of a small open economy. Recursive numerical solution methods are used to compute equilibrium co-movements of a model economy subject to stochastic disturbances affecting productivity or the terms of trade. These co-movements are compared with stylized facts of business cycles in Canada and Mexico to establish the model’s ability to assess the implications of capital mobility. Several simulation exercises are then conducted to examine the performance of the mobility indicators under different regimes of capital mobility and different specifications of the parameters used to measure relative risk aversion, the price elasticity of labor supply, and the variability and persistence of the stochastic shocks.

The results show that the strong Fisherian separation of saving and investment that holds in a deterministic environment, the principle on which the use of macroeconomic co-movements as indicators of capital mobility is based, is only a rough first approximation in a setting with uncertainty. This finding has significant quantitative implications for the usefulness of macroeconomic indicators of capital mobility. In particular, high saving-investment correlations are a necessary but not sufficient condition to establish the immobility of capital. Moreover, saving-investment correlations, as well as other indicators based on the cyclical behavior of output, consumption, and investment, tend to be more sensitive to slight differences in the parameters that describe preferences and the stochastic process of the disturbances than to the degree of capital mobility.

This analysis suggests that the evidence presented to date on capital mobility based on macroeconomic indicators should not be interpreted as showing that the welfare and efficiency gains resulting from the integration of world capital markets have not materialized. Furthermore, empirical tests aimed at establishing the mobility of capital across countries using macroeconomic indicators may be affected by the noise attributed to structural differences among the economies. Unless this information can be properly incorporated into the tests, an approach based on direct measurement of international flows of financial capital may be the best alternative.