nep-ifn New Economics Papers
on International Finance
Issue of 2018‒10‒01
one paper chosen by
Vimal Balasubramaniam
University of Oxford

  1. Gross Capital Flows and International Diversification By Hyunju Lee

  1. By: Hyunju Lee (University of Minnesota)
    Abstract: Gross capital flows, which arise from the changes in international investment positions, experienced a sudden collapse during the Great Recession in the United States and other advanced countries. This paper builds an open economy model of portfolio choice with two bonds and two non-tradable sectors. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements of real exchange rate make this portfolio a good hedge against non-tradable consumption risk. With a calibrated model, I find that the observed fluctuations in gross flows mitigated 4% of consumption drop during the Great Recession in the United States.
    Date: 2018

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