Date Added: Dec 2010
In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, the authors model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. They find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. They show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate.