Abstract:This paper studies the behavior of international capital flows driven by the portfolio reallocation decisions of international investors; so-called hot money. I develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates, interest rates and consumption in the U.S. and Europe. The model includes financial frictions that impede international risk-sharing and hot money flows driven by optimal portfolio reallocations. My analysis reveals tha… Show more
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