TY  - JOUR
AU  - Buera,Francisco J.
AU  - Shin,Yongseok
TI  - Productivity Growth and Capital Flows: The Dynamics of Reforms
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15268
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15268
L1  - http://www.nber.org/papers/w15268.pdf
N1  - Author contact info:
Francisco J. Buera
Department of Economics
University of California, Los Angeles
8283 Bunche Hall Office 8357
Mail Stop: 147703
Los Angeles, CA 90095
Tel: 310/825-8018
Fax: 310/825-9528
E-Mail: fjbuera@econ.ucla.edu

Yongseok Shin
Department of Economics
Washington University in St. Louis
One Brookings Drive
St. Louis, MO 63130
Tel: 314/935-7138
Fax: 314/935-4156
E-Mail: yshin@wustl.edu
AB  - Why doesn’t capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP—the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.
ER  -