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A Reappraisal of the Allocation Puzzle through the Portfolio Approach

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  • Kenza Benhima

Abstract

The neoclassical growth model predicts that emerging countries with higher TFP growth should receive larger capital inflows. Gourinchas and Jeanne (2007) document that, in fact, countries that exhibited higher productivity catch-up received less capital inflows, even though they invested more in their domestic technology. This is the allocation puzzle. I show that introducing investment risk in the same neoclassical framework qualifies the predictions in terms of capital flows: countries with higher TFP growth invest more in their own production but they have to hold external bonds for precautionary savings motives. Contrary to the riskless approach, the portfolio approach predicts accurately the allocation of capital flows across developing countries.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2008-27.

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Length: 47 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:drm:wpaper:2008-27

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Keywords: Growth accounting; Capital flows; Investment risk; Financial globalization; Portfolio choice;

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Cited by:
  1. Kenza Benhima & Baptiste Massenot, 2012. "Safety Traps," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 12.04, Université de Lausanne, Faculté des HEC, DEEP.
  2. Matthias Hoffmann & Michael Krause & Peter Tillmann, 2014. "International Capital Flows, External Assets and Output Volatility," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201442, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Keyu Jin & Stéphane Guibaud & Nicolas Coeurdacier, 2011. "Credit constraints and growth in a global economy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 35706, London School of Economics and Political Science, LSE Library.
  4. Damiano Sandri, 2014. "Growth and Capital Flows with Risky Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 102-23, July.

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