A Portfolio Model of Capital Flows to Emerging Markets

Michael B. Devereux () and Alan Sutherland ()

No 82009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.

Keywords: Country Portfolios; Emerging Markets (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2009-02
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Persistent link: http://EconPapers.repec.org/RePEc:hkm:wpaper:082009

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