International capital flows and development: financial openness matters

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 14 June 2013

Working Paper No. 472
By Dennis Reinhardt, Luca Antonio Ricci and Thierry Tressel

Does capital flow from rich to poor countries? We revisit the Lucas paradox and ask whether it results from a lack of capital account openness. We find that, when accounting for such openness, the prediction of neoclassical theory is empirically confirmed: among financially open economies, less-developed countries tend to experience net capital inflows and more-developed countries tend to experience net capital outflows. These results also hold when taking into account private flows, institutions, and numerous controls. We also show that reserve intervention has an effect on the current account only in financially open economies.

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