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MITLIBRARIES 3 9080 01917 661^ Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/countryportfolioOOkraa DE\A/BY 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.