Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America

Abstract

Since 1950, the economies of East Asia grew rapidly but received little inter-national capital, while Latin America received considerable international capitaleven as their economies stagnated. The literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections. This paper proposes a broader thesis that country-specificdistortions, such as domestic labor and capital market distortions, also impactcapital flows. We develop a DSGE model of Asia, Latin America, and the Rest ofthe World that features an open-economy business cycle accounting framework tomeasure these domestic and international distortions, and to quantify their con-tributions to international capital flows. We find that domestic distortions havebeen the predominant drivers of international capital flows, and that the generalequilibrium effects of these distortions are very large. International capital market distortions also matter, but less.

Business cycle accounting: What have we learned so far?

“…Not only the model is able to reproduce output path in both episodes, but also it reveals a "hidden" international transmission mechanism within the efficiency wedge. Ohanian et al (2015) questions the usual international-market-frictions explanations for capital inflows in East Asia and Latin America. Using a different type of IBCA, built on a three-country neoclassical DSGE model (with Latin American, East Asia and the rest of the world), they analyze what distortions are relevant for explaining capital inflow in both regions.…”

“…It is easy to see that BCA and its extensions have been used in two different types of analysis, either a single country, one or a few episodes, or within an international comparison, either in comprehensive studies as Brinca et al (2016), Brinca (2014) and Gerth & Otsu (2016), or regional comparisons like Lama (2011) and Ohanian et al (2015).…”

“…Major events like the Great Depression or the Great Recession may also call for more than one important distortion. See Chari et al (2007a), Bridji (2013), ***The international price wedge is not exactly the same as the international capital wedge, given the different framework for IBCA and a multi-country IBCA developed in Ohanian et al (2015).…”

Lekcje płynące z historii gospodarczej — kryzys azjatycki z 1997 roku a aktualna potrzeba rozwoju źródeł finansowania w walucie krajowej od rezydentów

“…Benmelech i Dvir (2011) argumentują nawet, że wzrost krótkoterminowego finansowania dłużnego przed kryzysem azjatyckim 1997 roku był nie tyle samodzielną przyczyną załamania gospodarczego, ile symptomem słabości instytucjonalnych, które należy interpretować jako główne źródło kryzysu 42 . Podobna interpretacja znalazła się w badaniu z 2015 43 opartym na modelu klasy DSGE, w którym badacze doszli do konkluzji, że w powojennej historii gospodarczej Azji oraz Ameryki Łacińskiej to wewnętrzne szoki były główną determinantą międzynarodowych przepływów kapitałowych. Szoki dotykające międzynarodowego rynku kapitałowego -zgodnie z wynikami badania -miały mniejsze znaczenie w kształtowaniu przepływów kapitałowych do poszczególnych krajów.…”

Non-linear pattern of international capital flows

“…Then, the capital flows from China to United States to finance the latter's huge borrowing. The international financial frictions such as capital controls and domestic frictions such as labor income taxation are employed on Ohanian, Restrepo-Echavarria and Wright (2015) to analyze the capital flows. Their calibration shows that the domestic distortions plays a greater role in accounting for the combination of high growth and low inflows of capital.…”