Abstract
Using bilateral Financial Account data from the Balance of Payments Statistics of 10 advanced economies for 2000–2016, this paper provides new evidence that total bilateral capital flows gravitate towards countries with less information asymmetries, financial centres, and those with stronger trade ties. These suggest that international financial markets remain highly fragmented. What is new in this paper is that we now have strong evidence that “aggregate” or total bilateral capital flows are responsive to gravity factors. The significance of gravity factors in explaining bilateral capital flows warrant their policy consideration.
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