Two-way capital flows: A risk-sharing approach

Ning Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: The two-way capital flows has been a persistent pattern existing in international capital market, i.e. net bond asset flows from developed countries to developing countries as a whole while net equity asset goes the other way around at the same time. In this paper, I construct a model of two-country open economy within which each country is subject to New-Keynesian frictions. Using new techniques of computing portfolio choices in macroeconomic models, I solve for the country holdings of equity and bond assets in such a general framework. Based on the recent work which estimate New-Keynesian macroeconomic model of US and Chinese economy, I introduce empirically relevant cross-country asymmetries with regard to different economic structure, country openness, monetary policy stance and severity of frictions, etc. in the model and show that the pattern of the two-way capital flows emerges as a result of agents seeking to attain high level of risk-sharing across countries through optimal portfolio allocation.

Keywords: International portfolio choices; Two-way capital áows; Emerging markets. (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2017-02
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2019_09

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