Working Paper: CEPR ID: DP9268
Authors: Philippe Bacchetta; Kenza Benhima
Abstract: In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries.
Keywords: capital flows; credit constraints; global imbalances
JEL Codes: E22; F21; F41; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity growth (O49) | Demand for foreign bonds (G15) |
| Productivity growth (O49) | Domestic investment (E22) |
| Demand for foreign bonds (G15) | Current account surplus (F32) |
| Domestic investment (E22) | Current account surplus (F32) |
| Credit constraints (E51) | Demand for liquidity (E41) |
| Demand for liquidity (E41) | Corporate saving behavior (D14) |
| Demand for liquidity (E41) | Capital flows (F32) |