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Gross Capital Flows and International Diversification

Hyunju Lee

No 51, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Gross capital flows, which arise from the changes in international investment positions, experienced a sudden collapse during the Great Recession in the United States and other advanced countries. This paper builds an open economy model of portfolio choice with two bonds and two non-tradable sectors. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements of real exchange rate make this portfolio a good hedge against non-tradable consumption risk. With a calibrated model, I find that the observed fluctuations in gross flows mitigated 4% of consumption drop during the Great Recession in the United States.

New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
Date: 2018
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