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 specic to the presence of dispersed infor-mation. First, gross and net capital flows become partially disconnected frompublicly observed fundamentals.[...]

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Year of publication:	2008-09-26
Authors:	Tille, Cédric ; Van Wincoop, Eric
Institutions:	Finrisk
Subject:	Information \| information \| Internationale Kapitalbewegung \| capital flows \| Streuung \| price dispersion

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1 Introduction
2 The Model
2.1 Production, Investment and Assets
2.2 Private Information and Noise
2.3 Consumption and Portfolio Choice
2.4 Asset and Goods Market Clearing
3 Solution Method
3.1 Asset Price Conjecture
3.2 Signal Extraction
3.3 General Equilibrium
4 Asset Prices, Portfolio Allocation and CapitalFlows
4.1 Asset Prices
4.2 Portfolio Allocation
4.3 International Capital Flows
5 Quantitative Assessment
5.1 Calibration Results
5.2 Evidence from Six Industrialized Countries
6 Conclusion
Appendix
References

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