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International capital flows, external assets and output volatility

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  • Hoffmann, Mathias

    ()

  • Krause, Michael

    ()

  • Tillmann, Peter

    ()

Abstract

Cross-sectional evidence for 119 developing, emerging, and developed countries shows over the last three decades that countries with an on average higher volatility of output growth experience more procyclical capital outflows over the business cycle than those countries with the same growth rate but a more stable output path. This stylized pattern shows up in addition to the recently established fact that countries with higher macroeconomic uncertainty tend to accumulate higher external asset positions. To explain this finding we present an open-economy real business cycle model with stochastic growth rates in which higher uncertainty of the expected income stream increases the precautionary savings of households. We show that the combination of income risk and the precautionary savings motive leads to both more procyclical capital outflows in the shorter run and a higher long-run external asset position.

Suggested Citation

  • Hoffmann, Mathias & Krause, Michael & Tillmann, Peter, 2019. "International capital flows, external assets and output volatility," Journal of International Economics, Elsevier, vol. 117(C), pages 242-255.
  • Handle: RePEc:eee:inecon:v:117:y:2019:i:c:p:242-255
    DOI: 10.1016/j.jinteco.2018.12.005
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    References listed on IDEAS

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    Cited by:

    1. Kollmann, Robert, 2015. "Risk Sharing in a World Economy with Uncertainty Shocks," CEPR Discussion Papers 10940, C.E.P.R. Discussion Papers.
    2. Hoffmann, Mathias & Krause, Michael & Tillmann, Peter, 2019. "International capital flows, external assets and output volatility," Journal of International Economics, Elsevier, vol. 117(C), pages 242-255.
    3. Kollmann, Robert, 2016. "International business cycles and risk sharing with uncertainty shocks and recursive preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 115-124.

    More about this item

    Keywords

    Capital flows; Net foreign assets; Productivity growth; Uncertainty; Precautionary savings;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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