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.