| Description |
As measured by the 1979 model proposed by Feldstein & Horioka (FH), productive capital does not appear to move across borders as freely or consistently as many current macroeconomic models assume. This paper examines the role of information in international capital mobility by extending the FH model to include a comprehensive index that measures how much information sharing a given country does with all other countries. Pooled, cross-sectional, longitudinal, and fixed-effects analyses are employed to evaluate information's effect on capital mobility. The proposed effect mechanism for information affecting capital mobility is that through a reduction in variance of outcomes (additional information reduces the predicted outcome set variance) for foreign investment projects, risk-adjusted returns for foreign investment projects are increased and therefore become relatively more attractive compared to domestic investment projects. The key findings are that information plays a statistically significant role in the level of capital mobility, that capital mobility response functions are heterogenous both over time and across countries, that country income level affects the direction of capital flow associated with increased information, and that information's significance strengthens during periods where capital is relatively more mobile. |
