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Composition of International Capital Flows: A Survey

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  • Kirabaeva, Korolai
  • Razin, Assaf

Abstract

In this survey, we focus on key mechanisms through which liquidity and financial shocks affect major types of capital flows. We focus on a few models that examine the role of asymmetric information, liquidity preferences, limited enforcement, and incomplete markets on the composition of capital flows. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. In the presence of asymmetric information between sellers and buyers in the capital market, foreign direct investment is associated with higher liquidation costs due to the adverse selection. The exposure to liquidity shocks can explain the composition of equity flows (FDI vs. FPI) between developed and emerging countries, as well as FDI flow patterns during financial crisis. In each section we also discuss the empirical relevance of the models in view of the empirical evidence.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7664.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7664

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Keywords: asymmetric information; capital flows; liquidity crisis;

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Cited by:
  1. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
  2. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "Medium-Term Determinants of International Investment Positions: The Role of Structural Policies," OECD Economics Department Working Papers 863, OECD Publishing.
  3. Martin Schmitz, 2011. "Financial reforms and capital flows to emerging Europe," Empirica, Springer, vol. 38(4), pages 579-605, November.
  4. Anton Jevcak & Ralph Setzer & Massimo Suardi, 2010. "Determinants of Capital Flows to the New EU Member States Before and During the Financial Crisis," European Economy - Economic Papers 425, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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