International Capital Flows under DispersedInformation: Theory and Evidence

We develop a new theory of international capital flows based on dispersed in-formation across individual investors. There is extensive evidence of informationheterogeneity within and across countries, which has proven critical to under-standing asset price behavior. We introduce information dispersion into an openeconomy dynamic general equilibrium portfolio choice model, and emphasize twoimplications for capital flows that are speci…c to the presence of dispersed infor-mation. First, gross and net capital flows become partially disconnected frompublicly observed fundamentals.[...]