Causality in international capital movements: the income mobility of Australian investment abroad

This paper explores the hypothesis that international capital flows are driven in part by the level of economic activity. It investigates the existence of the income mobility of capital, as distinct from the interest mobility of capital, by using Hsiao's approach to testing for Granger causality to model the relationship between Australian investment abroad and the Australian real GDP. We find some evidence that income causes capital flows but no evidence to support reverse causation from capital flows to income. This result suggests that the analytical construct of the income mobility of capital has empirical content.