International capital mobility in developing countries; theory and evidence

Despite the importance of international capital mobility in influencing the outcome of stabilization policies, there is little research on the issue i n developing countries. This paper tests the degree of capital mobility in nine developing countries, using the intertemporal consumption-smoothing fr amework. We find considerable evidence to suggest that capital is sufficien tly mobile in the countries under examination to facilitate consumption smo othing in the event of shocks to the national cash flow (national income ne t of private investment and government spending). Our findings also suggest that the impact of shocks to one or more components of the national cash f low on the current account is offset by dynamic responses of other componen ts, such that the current account balance is preserved from drastic movemen ts over time. (C) 1999 Elsevier Science Ltd. All rights reserved.