Capital Flows and Asset Prices

Kosuke Aoki, Gianluca D. Benigno and Nobuhiro Kiyotaki

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: After liberalizing international transactions of financial assets, many countries experiencelarge swings in asset prices, capital flows, and aggregate production. This paper studies howthe adjustment to capital account liberalization depends upon the degree of development of adomestic financial system, and why the economy with an underdeveloped financial systemmay be vulnerable to shocks to the domestic and foreign finance. We construct a model of asmall open economy in which it is difficult to enforce debtors to repay their debts unless thedebts are secured by collateral, and assets usable as collateral for international borrowing aremore restricted than domestic borrowing.

Keywords: capital flows; asset prices; domestic and international borrowing constraints (search for similar items in EconPapers)
JEL-codes: F32 F37 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-opm
Date: 2009-04
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0921

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