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How does openness to capital flows affect growth?

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  • Jordan Rappaport

Abstract

An average adjustment cost which is convex with respect to the rate of gross investment success-fully calibrates a neoclassical growth model to match real world observables including the transition paths of convergence speed, the shadow value of capital, interest rates, and savings rates. Comparing the open-economy and closed-economy versions of the calibrated model shows that relaxing the constraint that domestic savings finance domestic investment effects only a small increase in the growth rate of output per capita: less than one percentage point per year for an economy with current output 20 percent its steady-state level and less than one-half percentage point for an economy with current output 60 percent its steady-state level. Rather than higher growth, the main effect of openness to capital flows is higher current levels of consumption financed by large trade deficits.

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  • Jordan Rappaport, 2000. "How does openness to capital flows affect growth?," Research Working Paper RWP 00-11, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp00-11
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    Cited by:

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    2. Souhir Elhmedi & Niazi Kammoun, 2024. "Capital account liberalization and economic growth in Tunisia," SN Business & Economics, Springer, vol. 4(6), pages 1-21, June.
    3. Jaime Martínez-Martín, 2011. "General equilibrium long-run determinants for Spanish FDI: a spatial panel data approach," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(3), pages 305-333, September.
    4. Canning, Patrick & Wang, Zhi, 2003. "A Flexible Modeling Framework to Estimate Interregional Trade Patterns and Input-Output Accounts," Conference papers 331136, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    5. Rappaport, Jordan, 2005. "How does labor mobility affect income convergence?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 567-581, March.
    6. Jean-Pierre Allegret & Sana Azzabi, 2014. "Intégration financière internationale et croissance économique dans les pays émergents et en développement : le canal du développement financier," Revue d’économie du développement, De Boeck Université, vol. 22(3), pages 27-68.
    7. Roghieh Gholami & Sang‐Yong Tom Lee & Almas Heshmati, 2006. "The Causal Relationship Between Information and Communication Technology and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 29(1), pages 43-62, January.
    8. Aida Caldera Sánchez & Filippo Gori, 2016. "Can Reforms Promoting Growth Increase Financial Fragility?: An Empirical Assessment," OECD Economics Department Working Papers 1340, OECD Publishing.
    9. Alessandra dal Colle Stievano, 2004. "Finance-Growth Nexus in open economies with outliers," Money Macro and Finance (MMF) Research Group Conference 2004 4, Money Macro and Finance Research Group.
    10. Axel Dreher, 2002. "Does Globalization Affect Growth?," Development and Comp Systems 0210004, University Library of Munich, Germany, revised 16 Jun 2003.
    11. Monnet Benoît Patrick Gbakou & Mustapha Sadni Jallab & René Sandretto, 2008. "Foreign Direct Investment, Macroeconomic Instability And Economic Growth in MENA Countries," Post-Print halshs-00303694, HAL.
    12. Ji Uk Kim, 2008. "Economic Growth and Technology Diffusion in Developing Countries," Korean Economic Review, Korean Economic Association, vol. 24, pages 413-424.
    13. Jordan Rappaport, 2000. "Is the speed of convergence constant?," Research Working Paper RWP 00-10, Federal Reserve Bank of Kansas City.
    14. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
    15. Yaojun Yao, 2011. "International trade and technological progress in china: Evidence from time series," Frontiers of Economics in China, Springer;Higher Education Press, vol. 6(3), pages 464-478, September.

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