The Lucas paradox and the quality of institutions: then and now

Abstract

In the first era of financial globalization (1880-1914), global capital market integration led to substantial net capital movements from rich to poor economies. The historical experience stands in contrast to the contemporary globalization where gross capital mobility is equally high, but did not incite a substantial transfer of savings from rich to poor economies. Using data for the historical and modern periods we extend Lucas’ (1990) original model and show that differences in institutional quality between rich and poor countries can account for the sharply divergent patterns of international capital movements.