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International capital flows, portfolio composition, and the stability of external imbalances

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  • Devereux, Michael B.
  • Saito, Makoto
  • Yu, Changhua

Abstract

This paper develops a simple and tractable model of net capital flows in which time-varying gross country portfolios are an essential element in current account imbalances. The main constituents of country portfolios in the model are general derivatives, which could be interpreted as nominal bond assets and liabilities in particular. Under very weak conditions, the world wealth distribution is stationary. Stationarity is generated by movements in derivative (i.e., bond) risk-premia such that the return on a debtor country's gross liabilities is less than the return on its gross assets. This is well known feature of the US international investment position. We also provide suggestive evidence that a similar property holds more widely for a sample of advanced and emerging market countries.

Suggested Citation

  • Devereux, Michael B. & Saito, Makoto & Yu, Changhua, 2020. "International capital flows, portfolio composition, and the stability of external imbalances," Journal of International Economics, Elsevier, vol. 127(C).
  • Handle: RePEc:eee:inecon:v:127:y:2020:i:c:s002219962030101x
    DOI: 10.1016/j.jinteco.2020.103386
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    1. Rob Hayward & Andros Gregoriou, 2021. "International Capital Flows and Speculation," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 14(5), pages 1-12, April.

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    More about this item

    Keywords

    International portfolio choice; Current account; External imbalance; External adjustment; Self-correcting;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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