DP15647 Why Does Capital Flow from Equal to Unequal Countries?

Author(s): Sergio de Ferra, Kurt Mitman, Federica Romei
Publication Date: January 2021
Keyword(s): Capital Flows, current account, inequality
JEL(s): E21, F32, F41
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15647

Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.