International Capital Flows, External Assets and Output Volatility

Arbeitspapier

This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. To explain this finding we provide a theoretical mechanism within a stochastic real business cycle growth model in which higher uncertainty of the income stream increases the precautionary savings motive of households. They have a desire to save more when the variance of their expected income stream is higher. We show that in the model the combination of income risk and a precautionary savings motive will lead to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: MAGKS Joint Discussion Paper Series in Economics ; No. 42-2014

Classification and Topics

• Classification: Wirtschaft ; Current Account Adjustment; Short-term Capital Movements ; Financial Aspects of Economic Integration ; Economic Growth of Open Economies ; International Business Cycles
• Subject: Capital flows ; net foreign assets ; productivity growth ; uncertainty ; precautionary savings

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hoffmann, Matthias ; Krause, Michael ; Tillmann, Peter
• Event: Veröffentlichung
• (who): Philipps-University Marburg, Faculty of Business Administration and Economics
• (where): Marburg
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/105076
• Last update: 10.03.2025, 11:42 AM CET