International capital flows in club of convergence

Abstract

PurposeThe paper analyzes the pattern of international capital flows, accounting for the convergence on economic growth.Design/methodology/approachThe paper employs an empirical analysis combined with a theoretical model. The evidence is based on a cross-section regression over a sample of 172 economies. And the model is an open multi-country overlapping generation (OLG) economy.FindingsThe empirical evidence records that the pattern of international capital flows in the club of convergence can diverge from the pattern in the club of unconvergence. A higher productivity growth rate is associated with more net capital inflows in the club of convergence but less net capital inflows in the club of unconvergence. The theory shows that proximity to world technology frontier can explain the divergence of capital flows.Research limitations/implicationsThe result can account for controversies between theories on the cross-border capital flows: allocation puzzle, up-hill capital flows and neoclassical growth model.Originality/valueThe paper combines both the empirical analysis with the theoretical model construction to account for the role of convergence of economic growth on determining the pattern of international capital flows.