Composition of international capital flows : a survey /
Kirabaeva, Korolai.
Razin, Assaf,joint author.
Centre for Economic Policy Research (Great Britain)
London : Centre for Economic Policy Research,
2010.
In this survey, we focus on key mechanisms through which liquidity and financial shocks affect major types of capital flows. We focus on a few models that examine the role of asymmetric information, liquidity preferences, limited enforcement, and incomplete markets on the composition of capital flows. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. In the presence of asymmetric information between sellers and buyers in the capital market, foreign direct investment is associated with higher liquidation costs due to the adverse selection. The exposure to liquidity shocks can explain the composition of equity flows (FDI vs. FPI) between developed and emerging countries, as well as FDI flow patterns during financial crisis. In each section we also discuss the empirical relevance of the models in view of the empirical evidence.
Title from cover.
International macroeconomics.
Includes bibliographical references.
In this survey, we focus on key mechanisms through which liquidity and financial shocks affect major types of capital flows. We focus on a few models that examine the role of asymmetric information, liquidity preferences, limited enforcement, and incomplete markets on the composition of capital flows. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. In the presence of asymmetric information between sellers and buyers in the capital market, foreign direct investment is associated with higher liquidation costs due to the adverse selection. The exposure to liquidity shocks can explain the composition of equity flows (FDI vs. FPI) between developed and emerging countries, as well as FDI flow patterns during financial crisis. In each section we also discuss the empirical relevance of the models in view of the empirical evidence.
Composition of International Capital Flows