INSTITUTO MILENIO IMPERFECCIONES DE MERCADO Y POLÍTICA PÚBLICAS

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The Micro and Macro Dynamics of Capital Inflows

Abstract:

This paper shows that capital inflows affect the reallocation of resources within and across sectors through two main channels. First, the inflows tend to lower the relative price of capital, which promotes industries with relatively high capital elasticities – an input cost channel. Second, the inflows tend to increase aggregate consumption, which tilts the demand towards goods with high income elasticities – a consumption channel. The strength of these two channels determines the direction of the reallocation effects. We provide evidence for these two channels using firm-level census data from the financial liberalization in Hungary, a policy reform that led to capital inflows. We show that firms in capital-intensive industries expand differentially, as do firms in industries producing goods with high income elasticities. On the aggregate, the consumption channel dominates and reallocates resources towards high income elasticity activities, as services. These findings motivate developing a dynamic, firm-level, multi-sector open economy model with heterogeneous capital intensities and heterogeneous income elasticities. We calibrate the model and simulate a capital account liberalization that occurs during the economy’s transition to its steady-state. We find that the model can replicate our empirical results, and that the long-run outcomes depend on the extent of the liberalization.

Joint with Liliana Varela and Kei-Mu Yi

Location:

Sala de Consejo, Beauchef 851, piso 4 - Departamento de Ingeniería Industrial, U. de Chile.

Speaker:

Felipe Saffie

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