Financial globalization has been accompanied by global imbalance – capital flows from capital abundant developed countries (mostly North) to capital scarce developing countries (mostly South) in net terms. The recent disaggregate data shows, however, that the global capital flows in fact feature a pattern of two-way capital flows – the risky equity (including FDI) assets flow from the North to the South countries while the safe bond assets flow the other way around.
The purpose of this research project is to better understand financial globalization and capital flows by developing a theoretical and quantitative model that is able to simultaneously account for both the global imbalances (a fact of net portfolio flows) and two-way capital flows (a fact of gross portfolio flows). The model can be further developed to better understand the policy issues of great importance and relevance to the existing world economy – optimal monetary, exchange-rate, and capital control policies pertaining to the countries of different characteristics (e.g. developed v.s. developing countries, debtor v.s. creditor countries, more open and integrated economies v.s. less open economies and those exiting from existing economic/trade agreements) in an economically interconnected but unbalanced world.
