The demand for liquid assets, corporate saving, and international capital flows

The recent period of capital outflows from emerging economies has coincided with an increase in their corporate saving. In this paper, we model corporate saving as a demand for liquid assets by credit-constrained firms in a dynamic open-economy macroeconomic model. We 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. We 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. This framework is consistent with a number of stylized facts found in high-growth, high-investment emerging economies