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Two-way capital flows: A risk-sharing approach

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  • Ning Zhang

Abstract

The two-way capital flows has been a persistent pattern existing in international capital market, i.e. net bond asset flows from developed countries to developing countries as a whole while net equity asset goes the other way around at the same time. In this paper, I construct a model of two-country open economy within which each country is subject to New-Keynesian frictions. Using new techniques of computing portfolio choices in macroeconomic models, I solve for the country holdings of equity and bond assets in such a general framework. Based on the recent work which estimate New-Keynesian macroeconomic model of US and Chinese economy, I introduce empirically relevant cross-country asymmetries with regard to different economic structure, country openness, monetary policy stance and severity of frictions, etc. in the model and show that the pattern of the two-way capital flows emerges as a result of agents seeking to attain high level of risk-sharing across countries through optimal portfolio allocation.

Suggested Citation

  • Ning Zhang, 2017. "Two-way capital flows: A risk-sharing approach," Working Papers 2019_09, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2019_09
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    More about this item

    Keywords

    International portfolio choices; Two-way capital áows; Emerging markets.;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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