The Economic Consequences of the Rise in Capital Flows

This project will analyze the origins and consequences of capital allocation across countries. There are four broader impacts of this work. First, the project aims to develop new economic frameworks for the determination of international capital flows. Second, the project aims to provide summary statistics and other usable information from a comprehensive dataset on international security holdings at the firm and investor level. Third, the project will disseminate its findings to policy makers and the academic community through papers, reports, presentations in conferences and seminars, and writings in online blogs. Fourth, the project will train graduate students in the field of international finance and macroeconomics.

While great progress has been made in understanding capital flows using aggregated data, our project aims to use more disaggregated data from the Federal Reserve System in order to provide further insights on the motives, channels, and distortions that affect the map of capital flows. We will use the disaggregated data to inform and further develop economic theories of the joint determination of asset prices, exchange rates, and capital flows. An innovation of the project will be the use of the disaggregated nature of data to match security-level information with data on investor characteristics and firm-level balance sheet data. The dataset will paint a more comprehensive picture of the global asset holdings of U.S. investors and foreign U.S. liabilities and analyze more systematically the implications of increased capital flows for global financial markets. It is important to relate asset holdings to individual characteristics given the large heterogeneity of investors in terms of investment strategies, business models, and asset demand elasticities and the large heterogeneity of firms participating in international financial markets in terms of size, exporting, tangible and intangible investment, pricing, and production structure.