International Capital Flows

55 Pages Posted: 10 Jun 2008

See all articles by Cédric Tille

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2008

Abstract

The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice, an aspect that was largely cast aside when the ad-hoc portfolio balance models of the 1970s were replaced by models of optimizing agents. We develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two-country dynamic stochastic general equilibrium (DSGE) model. Our focus is on the time-variation in portfolio allocation following shocks, and the resulting capital flows. We show how endogenous time-variation in expected returns and risk, which are the key determinants of portfolio choice, affect capital flows in often subtle ways. The model is shown to be consistent with a broad range of empirical evidence. An additional contribution of the paper is to overcome the technical difficulty of solving DSGE models with portfolio choice by developing a broadly applicable solution method

Keywords: home bias, international capital flows, portfolio allocation

JEL Classification: F32, F36, F41

Suggested Citation

Tille, Cedric and van Wincoop, Eric, International Capital Flows (February 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1141611

Cedric Tille (Contact Author)

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

Eric Van Wincoop

University of Virginia - Department of Economics ( email )

Rouss Hall 114
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Charlottesville, VA 22904-4182
United States
804-924-3997 (Phone)
804-982-2904 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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