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A Reappraisal of the Allocation Puzzle through the Portfolio Approach

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Listed author(s):
  • 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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Paper provided by University of Paris West - Nanterre la Defense, EconomiX in its series EconomiX Working Papers with number 2008-27.

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Length: 47 pages
Date of creation: 2008
Handle: RePEc:drm:wpaper:2008-27
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Keywords: Growth accounting; Capital flows; Investment risk; Financial globalization; Portfolio choice;

Other versions of this item:

Find related papers by JEL classification:
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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