International Capital Flows: Private Versus Public Flows in Developing and Developed Countries

45 Pages Posted: 17 Nov 2020

See all articles by Yung Jun Kim

Yung Jun Kim

Sogang University

Jing Zhang

Federal Reserve Bank of Chicago

Date Written: October 21, 2020

Abstract

Empirically, net capital inflows are pro-cyclical in developed countries and counter-cyclical in developing countries. That said, private inflows are pro-cyclical and public in flows are counter-cyclical in both groups of countries. The dominance of private (public) in flows in developed (developing) countries drives the difference in total net inflows. We rationalize these patterns using a dynamic stochastic two-sector model of a small open economy facing borrowing constraints. Private agents over-borrow because of the pecuniary externality arising from constraints. The government saves abroad to reduce aggregate debt, making the economy resilient to adverse shocks. Differences in borrowing constraints and shock processes across countries explain the empirical patterns of capital inflows.

Keywords: reserves, pecuniary externality, cyclicality of net capital ows

JEL Classification: E44, F32, F34, F41

Suggested Citation

Kim, Yung Jun and Zhang, Jing, International Capital Flows: Private Versus Public Flows in Developing and Developed Countries (October 21, 2020). FRB of Chicago Working Paper No. 2020-27, Available at SSRN: https://ssrn.com/abstract=3730147

Yung Jun Kim

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Jing Zhang (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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