International Capital Flows under Dispersed Information: Theory and Evidence

62 Pages Posted: 2 Dec 2008  

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.

Keywords: information dispersion, international capital flows

JEL Classification: F32, F36, F41

Suggested Citation

Tille, Cédric and van Wincoop, Eric, International Capital Flows under Dispersed Information: Theory and Evidence (October 2008). CEPR Discussion Paper No. DP6989. Available at SSRN: https://ssrn.com/abstract=1308060

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 )

Rouss Hall 114
P.O. Box 400182
Charlottesville, VA 22904-4182
United States
804-924-3997 (Phone)
804-982-2904 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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