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Growth Expectations, Capital Flows and International Risk Sharing

44 Pages Posted: 16 Dec 2003  

Olli Castren

European Central Bank (ECB)

Roger Stiegert

European Central Bank (ECB)

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2003

Abstract

Over the past decades, cross-border financial flows have increased in importance and have in many occasions exceeded the underlying current account positions. This phenomenon has been accompanied by an increase in the volume of international equity transactions that accentuate the role of international risk sharing as a factor for the macroeconomic response to shocks. We use a stylised two-bloc, two-period model of the global economy, with a simple stochastic productivity shock affecting only one country. Efficient global risk-sharing imply that expected productivity gains in one country will attract equity inflows in excess of those needed to finance the current account. Upward-biased expectations about prospects for the productivity gains can further increase the risk exposure of foreign shareholders. The model is calibrated to show how ex post market losses - whether due to "normal" stock market downturn or ex ante over-optimism - are distributed and how they affect global consumption and current account positions. The results suggest that international spill over effects of stock market bubbles can contribute to business cycle synchronisation across economic areas.

Keywords: Capital flows, consumption smoothing, risk aversion, international risk sharing, international business cycle synchronisation

JEL Classification: F41, F32, G15

Suggested Citation

Castren, Olli and Stiegert, Roger and Miller, Marcus H., Growth Expectations, Capital Flows and International Risk Sharing (June 2003). ECB Working Paper No. 237. Available at SSRN: https://ssrn.com/abstract=457304

Olli Castren (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Roger Stiegert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marcus Miller

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3048/9 (Phone)
+44 24 7652 3032 (Fax)

Institute for International Economics

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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