Working Paper: CEPR ID: DP6989
Authors: Cedric Tille; Eric Van Wincoop
Abstract: We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries.
Keywords: information dispersion; international capital flows
JEL Codes: F32; F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital flows (F32) | Future fundamentals (G13) |
| Information dispersion (D39) | Capital flows (F32) |
| Private information (D82) | Expectations of asset payoffs (G19) |
| Expectations of asset payoffs (G19) | Portfolio allocation (G11) |
| Capital flows (F32) | Current publicly observed fundamentals (E39) |