Saving Wedge, Productivity Growth and International Capital Flows

Abstract

On one small open OLG economy, the productivity growth determines both the in- vestment through marginal product of capital and the savings through endogenous financial friction modeled as the capital income taxation. Therefore, the over-time fluctuation of international capital flows is shaped by the changes of productivity growth. The empirical evidences on one panel sample of 180 economies over 1980- 2013 confirm the endogeneity of financial friction as one mechanism underlying the impact of productivity growth on net total capital inflows. Furthermore, the combination of theory and evidences reveals that, for capital flows, the implication of Neo-Classical growth model works on the investment side, while the allocation puzzle applies on the saving side