The Micro and Macro Dynamics of Capital Flows

Felipe Saffie; Liliana Varela; Kei‐Mu Yi

doi:10.1093/restud/rdag066

The Micro and Macro Dynamics of Capital Flows

Felipe Saffie¹; Liliana Varela²; Kei‐Mu Yi³

¹ University of Virginia Darden School of Business and NBER , · ² London School of Economics and CEPR , UK · ³ Federal Reserve Bank of Dallas, U. of Houston and NBER ,

Review of Economic Studies 2026 open access

We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that nonhomotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness.

DOI: 10.1093/restud/rdag066
Language: en
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