NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Composition of Capital Flows: A Survey

Koralai Kirabaeva, Assaf Razin

NBER Working Paper No. 16492
Issued in October 2010
NBER Program(s):   IFM

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.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w16492

Published: Koralai Kirabaeva and Assaf Razin “Composition of Capital Flows” Encyclopedia of Financial Globalization , Elsevier , October, 2012.

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