Growth expectations; capital flows and international risk sharing

Marcus Miller (), Olli Castren () and Roger Stiegert ()
Additional contact information
Olli Castren: European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html
Roger Stiegert: European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 237, Working Paper Series from European Central Bank

Abstract: Over the past decades, cross-border financial flows have increased in importance and have in many occasions exceeded the underlying current account positions. This phenomenon has been accompanied by an increase in the volume of international equity transactions that accentuate the role of international risk sharing as a factor for the macroeconomic response to shocks. We use a stylised two-bloc, two-period model of the global economy, with a simple stochastic productivity shock affecting only one country. Efficient global risk-sharing imply that expected productivity gains in one country will attract equity inflows in excess of those needed to finance the current account. Upward-biased expectations about prospects for the productivity gains can further increase the risk exposure of foreign shareholders. The model is calibrated to show how ex post market losses - whether due to "normal" stock market downturn or ex ante over-optimism - are distributed and how they affect global consumption and current account positions. The results suggest that international spill over effects of stock market bubbles can contribute to business cycle synchronisation across economic areas. JEL Classification: F41; F32; G15.

Keywords: Capital flows; consumption smoothing; risk aversion; international risk sharing; international business cycle synchronisation. (search for similar items in EconPapers)
Date: 2003-06
View citations in EconPapers

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp237.pdf (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: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20030237

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().