Working Paper: NBER ID: w16492
Authors: Koralai Kirabaeva; Assaf Razin
Abstract: 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.
Keywords: No keywords provided
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Information asymmetry (D82) | inefficient capital allocation (D61) |
| foreign debt or equity financing (F34) | inefficient capital allocation (D61) |
| liquidity shocks (E44) | vulnerability of financial institutions (G21) |
| maturity mismatches (G32) | financial crises (G01) |
| maturity mismatches (G32) | capital flow reversals (F32) |
| moral hazard (G52) | inadequate borrowing (H74) |
| asymmetric information (D82) | inadequate borrowing (H74) |
| home bias (F23) | preference for holding domestic bonds (G15) |
| home bias (F23) | preference for holding equities (G12) |
| liquidity preferences (E41) | changes in investment behavior (G31) |
| financial crises (G01) | increase in FDI (F21) |
| financial crises (G01) | outflows of FPI (F21) |