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International Capital Flows, External Assets and Output Volatility

Author

Listed:
  • Matthias Hoffmann

    () (Deutsche Bundesbank)

  • Michael Krause

    () (Deutsche Bundesbank)

  • Peter Tillmann

    () (University of Gießen)

Abstract

This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. To explain this finding we provide a theoretical mechanism within a stochastic real business cycle growth model in which higher uncertainty of the income stream increases the precautionary savings motive of households. They have a desire to save more when the variance of their expected income stream is higher. We show that in the model the combination of income risk and a precautionary savings motive will lead to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.

Suggested Citation

  • Matthias Hoffmann & Michael Krause & Peter Tillmann, 2014. "International Capital Flows, External Assets and Output Volatility," MAGKS Papers on Economics 201442, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201442
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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/42-2014_tillmann.pdf
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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. 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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