International Capital Flows Under Dispersed Information: Theory and Evidence

60 Pages Posted: 10 Oct 2008 Last revised: 5 Jan 2009

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)

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Date Written: October 2008

Abstract

We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries.

Suggested Citation

Tille, Cedric and van Wincoop, Eric, International Capital Flows Under Dispersed Information: Theory and Evidence (October 2008). NBER Working Paper No. w14390. Available at SSRN: https://ssrn.com/abstract=1278463

Cedric Tille

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 (Contact Author)

University of Virginia - Department of Economics ( email )

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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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