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International Capital Flows, External Assets, and Output Volatility

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  • Krause, Michael
  • Hoffmann, Mathias
  • Tillmann, Peter

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. We explain this finding with a stochastic real business cycle growth model in which higher uncertainty of expected income increases households' precautionary savings. In the model, the combination of income risk and the precautionary savings motive leads to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.

Suggested Citation

  • Krause, Michael & Hoffmann, Mathias & Tillmann, Peter, 2014. "International Capital Flows, External Assets, and Output Volatility," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100508, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc14:100508
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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

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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