A portfolio model of capital flows to emerging markets

Michael B. Devereux, Alan Sutherland

    Research output: Contribution to journalArticlepeer-review

    31 Citations (Scopus)

    Abstract

    Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy. (C) 2008 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)181-193
    Number of pages13
    JournalJournal of Development Economics
    Volume89
    Issue number2
    DOIs
    Publication statusPublished - Jul 2009

    Keywords

    • Country portfolios
    • Emerging markets
    • ASSETS
    • TRADE

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