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Has the Lucas Paradox been fully explained?

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  • Azémar, Céline
  • Desbordes, Rodolphe

Abstract

Alfaro, Kalemli-Ozcan, and Volosovych (2008) argue that accounting for differences in institutional quality makes the Lucas Paradox disappear. We show that their key finding is driven by the presence of outliers. Once we control for them, we find that the Lucas Paradox remains.

Suggested Citation

  • Azémar, Céline & Desbordes, Rodolphe, 2013. "Has the Lucas Paradox been fully explained?," Economics Letters, Elsevier, vol. 121(2), pages 183-187.
    • Handle: RePEc:eee:ecolet:v:121:y:2013:i:2:p:183-187
    DOI: 10.1016/j.econlet.2013.07.025
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    2. Head, Keith & Mayer, Thierry & Ries, John, 2010. "The erosion of colonial trade linkages after independence," Journal of International Economics, Elsevier, vol. 81(1), pages 1-14, May.
    3. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2008. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 347-368, May.
    4. Wooldridge, Jeffrey M, 1994. "A Simple Specification Test for the Predictive Ability of Transformation Models," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 59-65, February.
    5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    6. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    7. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    8. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 133-162, January.
    9. Vincenzo Verardi & Christophe Croux, 2009. "Robust regression in Stata," Stata Journal, StataCorp LP, vol. 9(3), pages 439-453, September.
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    Citations

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    Cited by:

    1. Göktan, Mehmet Gökhan, 2015. "On the explanation of the Lucas Paradox," Economics Letters, Elsevier, vol. 137(C), pages 109-113.
    2. Mika Nieminen, 2017. "Patterns of international capital flows and their implications for developing countries," WIDER Working Paper Series wp-2017-171, World Institute for Development Economic Research (UNU-WIDER).
    3. Luca Coscieme & Paul Sutton & Lars F. Mortensen & Ida Kubiszewski & Robert Costanza & Katherine Trebeck & Federico M. Pulselli & Biagio F. Giannetti & Lorenzo Fioramonti, 2019. "Overcoming the Myths of Mainstream Economics to Enable a New Wellbeing Economy," Sustainability, MDPI, vol. 11(16), pages 1-17, August.
    4. Olufemi A Aluko & Muazu Ibrahim, 2019. "Does institutional quality explain the Lucas Paradox? Evidence from Africa," Economics Bulletin, AccessEcon, vol. 39(3), pages 1687-1693.
    5. Desbordes, Rodolphe & Koop, Gary, 2016. "Should we care about the uncertainty around measures of political-economic development?," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 752-763.
    6. Mika Nieminen, 2017. "Patterns of international capital flows and their implications for developing countries," WIDER Working Paper Series 171, World Institute for Development Economic Research (UNU-WIDER).
    7. MULOWAYI, Francis K. & PINSHI, Christian P., 2023. "Lucas Paradox, Institutional Quality and Corruption: Evidence from D.R. Congo," MPRA Paper 117370, University Library of Munich, Germany.
    8. Herrmann, Sabine & Kleinert, Jörn, 2014. "Lucas paradox and allocation puzzle: Is the euro area different?," Discussion Papers 06/2014, Deutsche Bundesbank.
    9. Le, Thai-Ha & Tran-Nam, Binh, 2018. "Relative costs and FDI: Why did Vietnam forge so far ahead?," Economic Analysis and Policy, Elsevier, vol. 59(C), pages 1-13.
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    11. Mehmet Pinar & Thanasis Stengos & Nikolas Topaloglou, 2022. "Stochastic dominance spanning and augmenting the human development index with institutional quality," Annals of Operations Research, Springer, vol. 315(1), pages 341-369, August.
    12. Alba Del Villar Olano, 2018. "The Lucas Paradox in the Great Recession: Does the type of capital matter?," Economics Bulletin, AccessEcon, vol. 38(2), pages 1052-1057.
    13. Pinar, Mehmet & Volkan, Engin, 2018. "Institutions and information flows, and their effect on capital flows," Information Economics and Policy, Elsevier, vol. 43(C), pages 34-47.

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    More about this item

    Keywords

    Capital flows; Institutional quality; Lucas Paradox; Outliers;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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