The views expressed here are those of the authors and not necessarily those of the IMF. The authors are grateful to Olivier Blanchard for sharing the Blanchard and Giavazzi (2002) data, which allowed benchmarking those results, and for his willingness to respond to successive drafts. They are grateful also to Gian Maria Milesi-Ferretti, Catia Batista, Kenichi Ueda, and to seminar participants at the IMF, the European Central Bank, and the Norface Seminar in Dublin. Our discussants at the Economic Policy panel meeting, Klaus Adam and Jean Imbs, were particularly helpful. The Managing Editor in charge of this paper was Giuseppe Bertola.
Financial integration, capital mobility, and income convergence
Article first published online: 3 APR 2009
© CEPR, CES, MSH, 2009
Volume 24, Issue 58, pages 241–305, April 2009
How to Cite
Abiad, A., Leigh, D. and Mody, A. (2009), Financial integration, capital mobility, and income convergence. Economic Policy, 24: 241–305. doi: 10.1111/j.1468-0327.2009.00222.x
- Issue published online: 3 APR 2009
- Article first published online: 3 APR 2009
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.
—Abdul Abiad, Daniel Leigh and Ashoka Mody