International Capital Flows under Dispersed Information: Theory and Evidence

Eric van Wincoop and Cédric Tille

No 6989, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries.

Keywords: Information dispersion; International capital flows (search for similar items in EconPapers)
JEL-codes: F32 F36 F41 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cba and nep-opm
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Citations: View citations in EconPapers (24)

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Working Paper: International Capital Flows under Dispersed Information: Theory and Evidence (2008)
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