DP6989 International Capital Flows under Dispersed Information: Theory and Evidence

Author(s):	Cédric Tille, Eric van Wincoop
Publication Date:	October 2008
Keyword(s):	information dispersion, international capital flows
JEL(s):	F32, F36, F41
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=6989

We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries.