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Gross Capital Flows and International Diversification

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  • Hyunju Lee

    (University of Minnesota)

Abstract

Gross capital flows, which arise from the changes in international investment positions, experienced a sudden collapse during the Great Recession in the United States and other advanced countries. This paper builds an open economy model of portfolio choice with two bonds and two non-tradable sectors. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements of real exchange rate make this portfolio a good hedge against non-tradable consumption risk. With a calibrated model, I find that the observed fluctuations in gross flows mitigated 4% of consumption drop during the Great Recession in the United States.

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  • Hyunju Lee, 2018. "Gross Capital Flows and International Diversification," 2018 Meeting Papers 51, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:51
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