A Portfolio Theory of International Capital Flows

Michael Devereux and Makoto Saito

The Institute for International Integration Studies Discussion Paper Series from IIIS

Abstract: This paper constructs a model in which the currency composition of national portfolios is an essential element in facilitating capital ‡ows between countries. In a two country environment, each country chooses optimal nominal bond portfolios in face of real and nominal risk.Current account deficits are financed by increases in domestic currency debt, but balanced by increases in foreign currency credit. This is combined with an evolution of risk-premiums such that the rate of return on the debtor country’s gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution.

Date: 2006-04-05
New Economics Papers: this item is included in nep-bec, nep-cba, nep-fin, nep-fmk and nep-ifn
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Citations: View citations in EconPapers (32)

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Related works:
Working Paper: A Portfolio Theory of International Capital Flows (2006)
Working Paper: A Portfolio Theory of International Capital Flows (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:iis:dispap:iiisdp124

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