Composition of Capital Flows: A Survey / Koralai Kirabaeva, Assaf Razin.

By:

Kirabaeva, Koralai

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w16492.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

F3 - International Finance

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Abstract: We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: 1. home court information advantage; 2. panic-based capital-flow reversals; 3. information-liquidity trade-off in the presence of source and host country liquidity shocks; 4. moral hazard in international debt contracts; and 5. risk sharing role of domestic bonds in the presence of home bias in goods and equity.

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October 2010.

We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: 1. home court information advantage; 2. panic-based capital-flow reversals; 3. information-liquidity trade-off in the presence of source and host country liquidity shocks; 4. moral hazard in international debt contracts; and 5. risk sharing role of domestic bonds in the presence of home bias in goods and equity.