Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/97430 
Year of Publication: 
2013
Series/Report no.: 
Reihe Ökonomie / Economics Series No. 301
Publisher: 
Institute for Advanced Studies (IHS), Vienna
Abstract: 
This paper studies theoretically how the cross-country differences in the institutional quality (IQ) of the domestic credit markets shape the patterns of international capital flows when such IQ differences cause productivity differences across countries. IQ affects productivity by changing productivity-agency cost trade-offs across heterogeneous investment projects, which have opposite effects on the investment and capital flows from exogenous productivity differences. The overall effect of IQ could generate U-shaped responses of the investment and capital flows. This means that capital could flow from middle-income to low-income and high-income countries; and starting from a low IQ, a country could experience both growth and a current account surplus after an institutional reform. More generally, the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions.
Subjects: 
Credit composition
domestic financial frictions
endogenous productivity
institutional quality
intertemporal trade
pledgeability
productivity-agency cost trade-off
reverse capital flows
Ushaped patterns
JEL: 
E22
F49
O16
Document Type: 
Working Paper

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