International Capital Flows

Eric van Wincoop and Cédric Tille

No 12856, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The sharp increase in both gross and net capital flows over the past two decades has led to a renewed interest in their determinants. Most existing theories of international capital flows are in the context of models with only one asset, which only have implications for net capital flows, not gross flows. Moreover, there is no role for capital flows as a result of changing expected returns and risk-characteristics of assets as there is no portfolio choice. In this paper we develop a method for solving dynamic stochastic general equilibrium open-economy models with portfolio choice. We show why standard first and second-order solution methods no longer work in the presence of portfolio choice, and extend them giving special treatment to the optimality conditions for portfolio choice. We apply the solution method to a particular two-country, two-good, two-asset model and show that it leads to a much richer understanding of both gross and net capital flows. The approach highlights time-varying portfolio shares, resulting from time-varying expected returns and risk characteristics of the assets, as a potential key source of international capital flows.

JEL-codes: F32 F36 F41 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-cba and nep-dge
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (85)

Published as Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.

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Related works:
Journal Article: International capital flows (2010)
Working Paper: International Capital Flows (2008)
Working Paper: International capital flows (2007)
Working Paper: International Capital Flows (2007)
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