DP8648 Sovereigns, Upstream Capital Flows, and Global Imbalances

Author(s):	Laura Alfaro, Sebnem Kalemli-Ozcan, Vadym Volosovych
Publication Date:	November 2011
Keyword(s):	aid/government debt, current account, productivity, puzzles of flows, reserves
JEL(s):	F21, F41, O1
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8648

The paper presents new stylized facts on the direction of capital flows. We find (i) international capital flows net of government debt and/or official aid are positively correlated with growth; (ii) sovereign debt flows are negatively correlated with growth only if debt is financed by another sovereign; (iii) public savings are robustly positively correlated with growth as opposed to private savings. Sovereign to sovereign transactions can fully account for upstream capital flows and global imbalances. These empirical facts contradict the conventional wisdom and constitute a challenge for existing theories.