The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

International Capital Flows

  • Shang-Jin Wei
Reference work entry


Cross-border capital flows may be regarded as either too small (known as the Lucas paradox) or too big (against the Samuelson theorem of factor price equalization). The resolution to the conflicting views may require thinking out of the neoclassical box. In theory, international capital flows can promote economic growth, but the data do not reveal a strong, robust, and causal effect, particularly for developing countries. The theoretical results and the empirical patterns can be reconciled through either a composition effect or a threshold effect. Some emerging evidence suggests that the two effects are related.


Composition hypothesis on capital flows Corruption Economic growth Factor price equalization theorem Financial globalization Foreign aid Foreign debt Foreign direct investment Heckscher–Ohlin–Samuelson model Institutional quality International capital asset pricing model (ICAPM) International capital flows Lucas paradox Portfolio equity flows Threshold hypothesis on capital flows Total factor productivity Trade costs 

JEL Classifications

F2 F3 
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The author is grateful to Andre Faria, Jiandong Ju, Ayhan Kose, Paolo Mauro, Gian Maria Milesi-Ferretti, Romain Ranciere, Kenneth Rogoff, and Irina Tytell for helpful discussion, and Yuanyuan Chen and Patricia Medina for capable research and editorial assistance. The views expressed in this article are the authors own, and do not reflect those of the IMF or any other organization he is associated with.


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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Shang-Jin Wei
    • 1
  1. 1.