A Theory of Net Capital Flows over the Global Financial Cycle

Jonathan Davis and Eric Van Wincoop

No 420, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We develop a theory to account for changes in net capital flows of safe and risky assets over the global financial cycle. We show empirically that countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt) during a downturn in the global financial cycle. This is accomplished through a rise in total net outflows and a drop in net outflows of risky assets. We develop a multi-country portfolio choice model that can account for these facts. The theory relies on cross-country heterogeneity in the share of an investor's portfolio invested in risky assets. A global drop in risky asset prices changes relative wealth across countries due to this heterogeneity, which leads to changes in net flows of safe and risky assets. The model is applied to 20 advanced countries and calibrated to reflect observed cross-country heterogeneity of net foreign asset positions of safe and risky assets. The implications of the calibrated model for net capital flows are quantitatively consistent with the data.

Keywords: global financial cycle; capital flows; current account; Portfolio Heterogeneity (search for similar items in EconPapers)
JEL-codes: F30 F40 (search for similar items in EconPapers)
Pages: 52
Date: 2023-05-06
New Economics Papers: this item is included in nep-des, nep-dge, nep-ifn, nep-mon and nep-opm
Note: This paper is related to a previous draft titled “A Theory of Gross and Net Capital Flows over the Global Financial Cycle."
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.dallasfed.org/~/media/documents/resear ... papers/2023/0420.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:96116

DOI: 10.24149/gwp420

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman (amy.chapman@dal.frb.org).