Income and Substitution Effects of Capital Inflows: A Fir m-Level Analysis joint with Felipe Saffie and Kei-Mu Yi
Abstract:
This paper shows that capital inflows affect the real location of resources within and across sectors and an economy's long-term outcomes through two forces. First, capital inflows reduce the relative pri ce of capital promoting industries with high capital elasticity, a substitu tion effect. Second, capital inflows allow consumption smoothing and increa se the demand of goods with high income elasticity, an income effect. The s trength of these two forces determines the direction of reallocation effect s. We provide evidence for these two forces using firm-level census data fr om the financial liberalization in Hungary, a policy reform that led to cap ital inflows. We show that firms in capital-intensive industries expand, as do firms in industries producing goods with high income elasticities. On t he aggregate the income effect dominates and reallocates resources towards high income elasticity industries, as services. These findings motivate dev eloping a dynamic, firm-level, multi-sector open economy model with varying capital intensities and non-homothetic preferences. We calibrate the model and simulate a capital account liberalization that occurs during the econo my's transition to its steady-state. We find that the model can replicate o ur empirical results, and that the long-run outcomes depend on the extent o f the liberalization.
DTSTAMP:20260403T183731Z DTSTART:20190408T163000Z DTEND:20190408T180000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR