The ability of individuals and firms to move capital across borders in search of the best rate of return.
(Peter Dungan, Toronto PPG1002H and Mankiw et al. 2008)
If there existed “perfect” capital mobility in the world, there would be no barriers to the flow of international capital. If there existed perfect capital mobility throughout the entire world, there would be one “world” interest rate for investors globally.
In reality, there are limits, which prevent capital mobility from being “perfect”. For example, different countries have different levels of default risk and lenders will demand a risk premium before lending to some countries. In countries such as these, the prevailing interest rate is the world rate plus this risk premium. Another barrier to perfect capital mobility is the different tax laws and regulations in each nation. Different countries tax domestic and foreign earnings differently or have different rules about portfolio holdings that limit perfect capital mobility. Some countries, most notably China, also have outright capital controls.
Information for this concept organized by Ben Eisen based on lecture notes from Peter Dungan’s PPG 1003H and Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.