DP16749 What Types of Capital Flows Help Improve International Risk Sharing?

Author(s): Ergys Islamaj, Ayhan Kose
Publication Date: November 2021
Keyword(s): aid flows, Capital Flows, International Risk Sharing, Remittances
JEL(s): E1, F02, F4, G01
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16749

Cross-border capital flows are expected to lead to increased international risk sharing by facilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes of various types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in a large sample of emerging market and developing economies. The results suggest that remittances and aid flows are associated with increased international risk sharing. Other types of capital flows are not consistently correlated with better risk-sharing outcomes. These findings are robust to the use of different econometric specifications, country-specific characteristics, and other controls.