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A Solution to Two Paradoxes of International Capital Flows
Author:
Shang-Jin Wei null

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Mr. Jiandong Ju
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 178
Language:
English
Publication Date:
01 Jul 2006
DOI:
https://doi.org/10.5089/9781451864380.001
ISBN:
9781451864380
ISSN:
1018-5941
Pages:
39
Keywords:
WP; financial system; interest rate
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund