The Lucas paradox revisited: a study on upstream capital flows and global imbalances

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School of Business | Master's thesis
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Date
2015
Major/Subject
Economics
Kansantaloustiede
Mcode
Degree programme
Language
en
Pages
61
Series
Abstract
We explore explanations for the reverse capital flows from developing countries to developed ones, namely the Lucas paradox. We find two main reasons. The first reason is from domestic financial factors which affect the direction of private international capital flows including foreign portfolios and direct investments. Our penal data analysis shows that, for the period of 1980-2011, the quality of economic institution and financial openness (both of which belong to the domestic financial factors) are explanations for the Lucas paradox. But the latter cannot completely explain the Lucas paradox. The second one is the export-driven growth strategy of some emerging markets. Those emerging markets undervalue their currencies by accumulating foreign exchange reserves, so that they can maintain trade surplus to drive economic growth, which leads to the reverse flows of public debts between governments.
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Keywords
Lucas paradox, current account, capital inflow, economic institution, reserve
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