A Micro to Macro Approach to International Capital Flows

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This project proposes a micro-to-macro approach to study the granular origins of international capital flows. Its starting point is the hypothesis that, if the distribution of firms engaging in cross-border flows is fat-tailed, idiosyncratic shocks would not cancel out and could account for a non-negligible part of dynamics of international capital flows. I employ this micro-to-macro approach to revisit some of the main questions in international economics. My proposal has two strands linked by this common approach.In the first of these strands, I employ a novel data at the agent-transaction level on the Balance of Payment and the International Investment Position to evaluate the granularity of international flows and revisit the exchange rate disconnect puzzle, international business cycle comovement and the importance of valuation effects on external adjustments. The particular questions that I propose tackling are: (1) Are the dynamics of international flows in a country driven, at least in part, by idiosyncratic firm-specific shocks? If so, by how much? (2) Do shocks to large firms affect the exchange rate? (3) Do large firms' financial linkages affect international business cycle comovement? (4) How does the distribution of valuation changes on foreign assets affect external adjustments?In the second of these strands, I assess the role of individual investors' beliefs on capital flows. I start by revisiting the Uncovered Interest Rate Parity puzzle and propose a decomposition framework to assess how much of its failure arises from investors' subjective beliefs and how much from their risk aversion. Once the importance of investors' beliefs is recognised, I ask the following questions: (1) Do exchange rate expectations affect investors' international portfolio allocation? (2) Are these beliefs heterogeneous across agents? What are their determinants? (3) Are global investors' beliefs consistent with the theoretical literature on currency crises?