Country portfolios

78 Pages·2000·1.8 MB·English

by  Kraay, Aart

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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
COUNTRY PORTFOLIOS^
Aart Kraay, The World Bank
Norman Loayza, Banco Central de Chile
and The World Bank
Luis Serven, The World Bank
Jaume Ventura, MIT
Working Paper 00-16
July 2000
Room
E52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
id=XXXXXX
http://papers.ssm.com/paper.taf?abstract
'M^^'CHUSETTS iNSTlTUTE
OFTECHNOLOGY
OCT 2 5
LIBRARIES
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
COUNTRY PORTFOLIOS^
Aart Kraay, The World Bank
Norman Loayza, Banco Central de Chile
and The World Bank
Luis Serven, The World Bank
Jaume Ventura, MIT
Working Paper 00-16
July 2000
Room
E52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
id=XXXXXX
http://papers.ssm.conVpaper.taf/abstract

Abstract
How do countries hold their financial wealth? We construct a new database ofcountries' claims
on capital located at home and abroad, and international borrowing and lending, covering 68
We
countries from 1966 to 1997. find that a small amount ofcapital flows from rich countries to
poor countries. Countries' foreign asset positions are remarkably persistent, and mostly take the
form offoreign loans rather than foreign equity.
To interpret these facts, we build a simple model ofintemafional capital flo9ws that highlights
the interplay between diminishing returns, production risk and sovereign risk. We show that in
the presence ofreasonable diminishing returns and production risk, the probability that
international crises occur twice a century is enough to generate a set ofcounfryportfolios that are
roughly consistent with the data.
*We thank Mark Aguiar, Daron Acemoglu, Giancarlo Corsetti, Raquel Fernandez, Robert E.
Lucas and Mark Wright for insightful comments on a previous draft and Gian Maria Milesi-
We
Ferretti for his advice in the construction ofour dataset. are also grateful to Cesar Calderon,
Alex Karaivanov, George Monokroussos, and Rashmi Shankar for excellent research assistance.
The opinions expressed here are the authors' and do not necessarily reflect those ofthe World
Bank, its executive directors, or the countries they represent. Financial support from the
Regional Studies Program ofthe Latm American Region ofthe World Bank is gratefully
acknowledged.