Financial Markets Department
Bank of Canada
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Ottawa ON K1A 0G9 Canada
The views expressed in this paper are those of the
Institutional Affiliation: Bank of Canada
NBER Working Papers and Publications
|October 2010||Composition of Capital Flows: A Survey|
with Assaf Razin: w16492
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.
Published: Koralai Kirabaeva and Assaf Razin “Composition of Capital Flows” Encyclopedia of Financial Globalization , Elsevier , October, 2012.
|December 2009||Composition of International Capital Flows: A Survey|
with Assaf Razin: w15599
In an integrated world capital market with perfect information, all forms of capital flows are indistinguishable. Information frictions and incomplete risk sharing are important elements that needed to differentiate between equity and debt flows, and between different types of equities. This survey put together models of debt, FDI, Fpi flows to help explain the composition of capital flows.
With information asymmetry between foreign and domestic investors, a country which finances its domestic investment through foreign debt or foreign equity portfolio issue, will inadequately augment its capital stock. Foreign direct investment flows, however, have the potential of generating an efficient level of domestic investment.
In the presence of asymmetric information between sellers and buy...
Published: “Composition of Capital Flows” Encyclopedia of Financial Globalization, Elsevier, October, 2012.