We study the determinants of capital income flows within Europe. We compare the pattern of capital income flows between countries to capital income flows between regions. Simple neoclassical open economy models predict that capital will flow to regions/countries with relatively high output growth. This prediction is confirmed for regions within European countries but the magnitude is smaller than predicted. We find no association between capital flows and growth for the European countries except for Ireland. Net capital flows between regions are large in northern Europe but very small in Italy and Spain. This difference partly explained by the industrial structure and partly by taxes and transfers. Overall the results suggest that capital markets are integrated among European regions–though to a lesser extent than the U.S. states— and not integrated at all across European countries
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