Composition of International Capital Flows: A Survey
HKIMR Working Paper No.14/2011
32 Pages Posted: 20 Jun 2011
Date Written: May 27, 2011
We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: (1) home-court information advantage; (2) panic-based capital-flow reversals; (3) information-liquidity trade-off in the presence of source and host country liquidity shocks; (4) moral hazard in international debt contracts; and (5) risk sharing role of domestic bonds in the presence of home bias in goods and equities.
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