Composition of International Capital Flows: A Survey

Assaf Razin and Korolai Kirabaeva

No 7664, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this survey, we focus on key mechanisms through which liquidity and financial shocks affect major types of capital flows. We focus on a few models that examine the role of asymmetric information, liquidity preferences, limited enforcement, and incomplete markets on the composition of capital flows. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. In the presence of asymmetric information between sellers and buyers in the capital market, foreign direct investment is associated with higher liquidation costs due to the adverse selection. The exposure to liquidity shocks can explain the composition of equity flows (FDI vs. FPI) between developed and emerging countries, as well as FDI flow patterns during financial crisis. In each section we also discuss the empirical relevance of the models in view of the empirical evidence.

Keywords: Asymmetric information; Capital flows; Liquidity crisis (search for similar items in EconPapers)
JEL-codes: F21 F34 (search for similar items in EconPapers)
Date: 2010-01
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Composition of International Capital Flows: A Survey (2011)
Working Paper: Composition of International Capital Flows: A Survey (2010)
Working Paper: Composition of International Capital Flows: A Survey (2009)
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