Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244241 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-27
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
Empirically, net capital inflows are pro-cyclical in developed countries and countercyclical in developing countries. That said, private inflows are pro-cyclical and public inflows are counter-cyclical in both groups of countries. The dominance of private (public) inflows in developed (developing) countries drives the difference in total net inflows. We rationalize these patterns using a dynamic stochastic two-sector model of a small open economy facing borrowing constraints. Private agents over-borrow because of the pecuniary externality arising from constraints. The government saves abroad to reduce aggregate debt, making the economy resilient to adverse shocks. Differences in borrowing constraints and shock processes across countries explain the empirical patterns of capital inflows.
Subjects: 
reserves
pecuniary externality
cyclicality of net capital flows
JEL: 
E44
F32
F34
F41
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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