Why Does Capital Flow from Equal to Unequal Countries?

Authors: Sergio de Ferra; Kurt Mitman; Federica Romei

Abstract

Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.