On the determinants of net international portfolio flows: A global perspective

In a panel covering a large number of countries from 1970 to 2003, we show that population ageing, institutions, money and deviations from the Uncovered Interest Parity (UIP) influence developments in net capital flows. Population ageing is associated with net equity inflows, net outflows in debt instruments and current account deficits. Better institutions favor net capital inflows. Higher money to GDP ratio – associated with lower interest rates – enhances international investments in domestic stocks to the detriment of the less attractive domestic bonds. As for the deviations from the UIP, a rise in the short-term domestic interest rate above its trend brings about an equilibrating portfolio shift away from domestic debt instruments.