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EXPORT INSTABILITY AND LONG‐TERM CAPITAL FLOWS: RESPONSE TO ASSET RISK IN A SMALL ECONOMY
Author(s) -
Nash JOHN
Publication year - 1990
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1990.tb00818.x
Subject(s) - economics , asset (computer security) , portfolio , investment (military) , monetary economics , term (time) , capital (architecture) , small open economy , foreign direct investment , investment portfolio , international economics , financial economics , macroeconomics , physics , computer security , archaeology , quantum mechanics , politics , computer science , political science , exchange rate , law , history
An open capital account allows long‐term capital flows to automatically mitigate adverse effects of export instability on domestic saving and investment. An application of portfolio management theory shows that risks that are systematic to the domestic market are diversified internationally. This may help explain why foreign investment finances many high‐risk investments in export sectors of LDCs and why results of studies of the effects of export instability show inconsistent results. This theory is presented and tested empirically.