Financial Development, Capital Flow, and Income Differences between Countries

Kunieda, Takuma (2008): Financial Development, Capital Flow, and Income Differences between Countries.

Abstract

This paper demonstrates with a simple two-country general equilibrium model that the difference in the levels of financial development between countries determines the direction of capital movement and that for some parameter values, if financial markets are integrated internationally, countries with a poorly developed financial sector are never industrialized, while if they had remained closed economies, they would have experienced steady endogenous growth. This result is consistent with a traditional but non-mainstream view of structuralists and gives a theoretical foundation for capital flow regulations which are often imposed by developing countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial development; Capital flow; Income differences between countries; Credit market imperfections; Two-country model
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; F - International Economics > F2 - International Factor Movements and International Business

References

Aghion, P., A. Banerjee, and T. Piketty (1999), Dualism and Macroeconomic Volatility, Quarterly Journal of Economics 114, 1359-1397.

Alfaro L., S. Kalemli-Ozcan, and V. Volosovych, (2008), Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation, Review of Economics and Statistics 90, 347-368.

Chinn M.D. and H. Ito, (2006), What Matters for Financial Development? Capital Controls, Institutions, and Interactions, Journal of Development Economics 81, 163-192.

Edwards S. (2001). Capital Mobility and Economic Performance: Are Emerging Economies Different?, NBER Working Paper No.8076.

Galor O. and J. Zeira (1993). Income Distribution and Macroeconomics, Review of Economic Studies 60, 30-52.

Gertler M. and K. Rogoff (1990). North-South Lending and Endogenous Domestic Capital Market Inefficiencies, Journal of Monetary Economics 26, 245-266.

Jeong H. and R.M. Townsent (2007). Sources of TFP Growth: Occupational Choice and Financial Deepening, Economic Theory 32, 179-221.

Kikuchi T. (2008). Inequality of Nations and Endogenous Fluctuations, Bielefeld University, Discussion Paper 554.

Kose M.A., E. Prasad, K. Rogoff, and S. Wei (2006). Financial Globalization: A Reappraisal, NBER Working Paper No.12484.

Lagos R. (2006). A Model of TFP, Review of Economic Studies 73, 983-1007.

Matsuyama K. (2007). Aggregate Implications of Credit Market Imperfections, forthcoming in D. Acemoglu, K. Rogoff, and M. Woodford, eds, NBER Macroeconomics Annual 2007, Vol.22, MIT Press, Cambridge, MA, USA, 2007.

Matsuyama K. (2004). Financial Market Globalization, Symmetry-Breaking and Endogenous Inequality of Nations, Econometrica 72, 853-884.

Myrdal K., (1957). Economic Theory and Underdeveloped Regions, Duckworth: London.

Nurkse, R. (1953). Problems of Capital Formation in Underdeveloped Countries, Blackwell: New York, NY, USA.

Prescott E.C. (1998) Needed: A Theory of Total Factor Productivity, International Economic Review 39, 525-551.

Reinhart C.M. and K.S. Rogoff (2004) Serial Default and the ``Paradox" of Rich-to-Poor Capital Flows, The American Economic Review 94, 53-58.

Sakuragawa M. and K. Hamada (2001) Capital Flight, North-South Lending, and Stages of Economic Development, International Economic Review 42, 1-24.

Tornell A. and A. Velasco (1992). The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries, The Journal of Political Economy 100, 1208-1231.