Two-way capital flows: A risk-sharing approach

Zhang, N. (2021) Two-way capital flows: A risk-sharing approach. Working Paper. University of Glasgow.

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202546.pdf - Accepted Version



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 holding 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.

Item Type:Research Reports or Papers (Working Paper)
Additional Information:Financial support from ESRC is acknowledged.
Glasgow Author(s) Enlighten ID:Zhang, Ning
Authors: Zhang, N.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Publisher:University of Glasgow
Copyright Holders:Copyright © 2021 The Author
Publisher Policy:Reproduced with the permission of the Author

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