{
  "title": "A Solution to Two Paradoxes of International Capital Flows",
  "publication": "IMF Working Papers, July 1, 2006",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/a-solution-to-two-paradoxes-of-international-capital-flows-19261",
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  "summary": "International capital flows from rich to poor countries can be regarded as either too low (the Lucas paradox in a one-sector model) or too high (when compared with the logic of factor price equalization in a two-sector model).",
  "sections": [
    {
      "heading": "Core research question and paradoxes",
      "content": "- Examines why international capital flows from rich to poor countries can appear either:\n  - \"too low\" — the Lucas paradox in a one-sector model, or\n  - \"too high\" — when compared with the logic of factor price equalization in a two-sector model.\n- Objective: reconcile these two seemingly contradictory observations within a single theoretical framework."
    },
    {
      "heading": "Model and methodological features",
      "content": "- Introduces a non-neoclassical model that features:\n  - financial contracts, and\n  - firm heterogeneity.\n- Emphasizes how gross capital flow patterns emerge as a function of:\n  - the quality of the financial system, and\n  - the level of protection for property rights (i.e., the risk of expropriation)."
    },
    {
      "heading": "Key findings",
      "content": "- Free patterns of gross capital flow are determined by financial-system quality and expropriation risk.\n- A poor country with an inefficient financial system but a low expropriation risk may:\n  - simultaneously experience an outflow of financial capital, and\n  - experience an inflow of foreign direct investment (FDI),\n  - resulting in a small net capital flow.\n- The model offers a resolution to both the Lucas-paradox view (insufficient capital flowing to poor countries) and the factor-price-equalization view (excessive capital flows implied by two-sector neoclassical models)."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subject: Capital flows, Foreign direct investment, Self-employment, Trade in goods, Trade liberalization\n- Keywords: financial system, interest rate, WP\n\n---\n\n Content in this bundle\n\n- wp06178\n  - wp06178 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp06178 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-solution-to-two-paradoxes-of-international-capital-flows-19261"
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    "Authors: Shang-Jin Wei, Jiandong Ju",
    "Published: July 1, 2006",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451864380.001",
    "Examines why international capital flows from rich to poor countries can appear either:",
    "Objective: reconcile these two seemingly contradictory observations within a single theoretical framework.",
    "Introduces a non-neoclassical model that features:",
    "Emphasizes how gross capital flow patterns emerge as a function of:",
    "Free patterns of gross capital flow are determined by financial-system quality and expropriation risk.",
    "A poor country with an inefficient financial system but a low expropriation risk may:",
    "The model offers a resolution to both the Lucas-paradox view (insufficient capital flowing to poor countries) and the factor-price-equalization view (excessive capital flows implied by two-sector neoclassical models).",
    "Subject: Capital flows, Foreign direct investment, Self-employment, Trade in goods, Trade liberalization",
    "Keywords: financial system, interest rate, WP",
    "**_wp06178**"
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