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Composition of Capital Flows: A Survey

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  • Koralai Kirabaeva
  • Assaf Razin

Abstract

We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: 1. home court information advantage; 2. panic-based capital-flow reversals; 3. information-liquidity trade-off in the presence of source and host country liquidity shocks; 4. moral hazard in international debt contracts; and 5. risk sharing role of domestic bonds in the presence of home bias in goods and equity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16492.

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Date of creation: Oct 2010
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Publication status: published as Koralai Kirabaeva and Assaf Razin “Composition of Capital Flows” Encyclopedia of Financial Globalization , Elsevier , October, 2012.
Handle: RePEc:nbr:nberwo:16492

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  1. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2005. "World market integration through the lens of foreign direct investors," Journal of International Economics, Elsevier, Elsevier, vol. 66(2), pages 267-295, July.
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  3. Pierre-Olivier Gourinchas & Nicolas Coeurdacier, 2008. "When Bonds Matter: Home Bias in Goods and Assets," 2008 Meeting Papers 342, Society for Economic Dynamics.
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  5. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis," NBER Working Papers 15207, National Bureau of Economic Research, Inc.
  6. Lane, Philip R. & Shambaugh, Jay C, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6887, C.E.P.R. Discussion Papers.
  7. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance, EconWPA 0405004, EconWPA.
  8. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 121(6), pages 1108 - 1159.
  9. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, American Economic Association, vol. 100(1), pages 518-40, March.
  10. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
  11. Nicolas Coeurdacier, 2006. "Do trade costs in goods market lead to home bias in equities?," 2006 Meeting Papers, Society for Economic Dynamics 111, Society for Economic Dynamics.
  12. Michael W. Klein & Joe Peek & Eric S. Rosengren, 2002. "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 664-682, June.
  13. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  14. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 783-796, May.
  15. Loungani, Prakash & Mody, Ashoka & Razin, Assaf, 2002. "The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 526-43, December.
  16. Itay Goldstein & Assaf Razin & Hui Tong, 2008. "Liquidity, Institutional Quality and the Composition of International Equity Outflows," NBER Working Papers 13723, National Bureau of Economic Research, Inc.
  17. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 691, Board of Governors of the Federal Reserve System (U.S.).
  18. Mark Aguiar & Gita Gopinath, 2005. "Fire-Sale Foreign Direct Investment and Liquidity Crises," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 439-452, August.
  19. Akito Matsumoto & Charles Engel, 2009. "International Risk Sharing," IMF Working Papers 09/138, International Monetary Fund.
  20. Viktor Tsyrennikov, 2007. "Capital Flows and Moral Hazard," 2007 Meeting Papers, Society for Economic Dynamics 455, Society for Economic Dynamics.
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Cited by:
  1. 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.
  2. Bacchetta Philippe & Benhima Kenza, 2010. "The Demand for Liquid Assets, Corporate Saving, and Global Imbalances," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 10.12, Université de Lausanne, Faculté des HEC, DEEP.
  3. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
  4. Xingwang Qian & Andreas Steiner, 2012. "International Reserves and the Composition of Equity Capital Inflows," Working Papers, Institute of Empirical Economic Research 90, Institute of Empirical Economic Research.

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