Financial integration, capital mobility, and income convergence

Abdul Abiad, Daniel Leigh, Ashoka Mody

Research output: Contribution to journalArticlepeer-review

51 Scopus citations

Abstract

Recent studies have found that capital moves 'uphill' from poor to rich countries, and brings little or no growth dividend when it does flow into poor economies. We show that Europe does not conform to this paradigm. In the European experience of financial integration, capital has flown from rich to poor countries, and such inflows have been associated with significant acceleration of income convergence. Analysing broader samples of countries, we find that 'downhill' capital flows tend to be observed above certain thresholds in institutional quality and financial integration. But Europe remains different even when allowing for such threshold effects, and its experience is similar to that of interstate flows within the United States. Our findings are consistent with the notion that financial diversification reduces countries' incentives to save in order to self-insure against specific shocks.

Original languageEnglish (US)
Pages (from-to)241-305
Number of pages65
JournalEconomic Policy
Volume24
Issue number58
DOIs
StatePublished - 2009
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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