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International Capital Flows: Private Versus Public Flows in Developing and Developed Countries

Yun Jung Kim () and Jing Zhang ()

No WP-2020-27, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Empirically, net capital inflows are pro-cyclical in developed countries and counter-cyclical in developing countries. That said, private inflows are pro-cyclical and public in flows are counter-cyclical in both groups of countries. The dominance of private (public) in flows in developed (developing) countries drives the difference in total net inflows. We rationalize these patterns using a dynamic stochastic two-sector model of a small open economy facing borrowing constraints. Private agents over-borrow because of the pecuniary externality arising from constraints. The government saves abroad to reduce aggregate debt, making the economy resilient to adverse shocks. Differences in borrowing constraints and shock processes across countries explain the empirical patterns of capital inflows.

Keywords: reserves; pecuniary externality; cyclicality of net capital ows (search for similar items in EconPapers)
JEL-codes: E44 F32 F34 F41 (search for similar items in EconPapers)
Pages: 45
Date: 2020-11-13
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac, nep-mon and nep-opm
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DOI: 10.21033/wp-2020-27

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