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Lunch Seminar: Robert S. Chirinko - University of Illinois at Chicago
Wednesday 17 April 2019, 01:00pm - 02:00pm

International Capital Allocations: The Lucas Paradox and other Puzzles with Debdulal Mallick

Abstract:

"Why Doesn’t Capital Flow from Rich to Poor Countries?” This provocative question posed by Lucas in 1990 initiated a line of research focusing on the substantial differences in the marginal product of private capital (MPK) across countries. Large and sustained differences in MPKs between poor and rich countries define the Lucas Paradox, which is sharply at odds with capital’s pursuit of profitable investment opportunities and diminishing returns to capital accumulation that are at the core of the neoclassical framework. Subsequent studies with improved measurement have largely resolved the Lucas Paradox. This paper re-examines this evidence with new data, enhanced measurement, and a more nuanced definition of convergence. We begin by showing that the Lucas Paradox has reemerged with the most recently available data. Moreover, the difference between the MPK’s for rich and poor countries is widened when adjustments are made for the shadow economy and government capital. A new puzzle emerges, as there is a clear structural break in 1990, after which the MPK’s for both rich and poor countries rise. Such an increase is at odds with the global saving glut and secular stagnation. We then argue, however, that a comparison of average MPK’s is not appropriate for evaluating the efficiency of international capital allocations because they are sensitive to transition dynamics and country-specific steady-states. These problems are addressed in a partial adjustment model. Conditional on these steady-states, international capital allocations are reassessed. The steady-state MPK’s are related to institutional infrastructure and finance constraints. Counterfactual exercises gauge the impact of international capital misallocations on world output.

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