Productivity Growth and Capital Flows: The Dynamics of Reforms†

Productivity Growth and Capital Flows: The Dynamics of Reforms† AbstractWhy doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms. (JEL E21, E22, F21, F32, O16, O47) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Productivity Growth and Capital Flows: The Dynamics of Reforms†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7715
D.O.I.
10.1257/mac.20160307
Publisher site
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Abstract

AbstractWhy doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms. (JEL E21, E22, F21, F32, O16, O47)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2017

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