A single large firm's financial hiccup can ripple through a country's exchange rate and international capital flows, according to the hypothesis driving this research. Most economic models treat international capital flows as the smooth aggregate of millions of small, independent decisions. This project challenges that assumption. It starts from the observation that a handful of giant multinational corporations dominate cross-border transactions. If that distribution is "fat-tailed"—meaning a few firms account for a disproportionate share of activity—then a shock to one of those firms (a bankruptcy, a sudden repatriation of profits) could measurably move a nation's exchange rate or its balance of payments. The researcher will test this using novel transaction-level data from national accounts. If the hypothesis holds, it would force a fundamental rethink of how economists model currency movements, business cycles, and financial crises. Current models treat exchange rates as driven by interest rates, inflation, and other macro forces; this work suggests that corporate micro-behaviour matters too. The second strand of the project examines whether individual investors' beliefs about future exchange rates—not just their risk aversion—explain the persistent failure of the "uncovered interest parity" theory. This is fundamental science in economics: it aims to understand the granular mechanics of international finance, with potential long-term implications for how central banks and policymakers interpret capital flow data.
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This project proposes a micro-to-macro approach to study the granular origins of international capital flows. Its starting point is the hypothesis that, if the distribution of firms engaging in cross-border flows is fat-tailed, idiosyncratic shocks would not cancel out and could account for a non-negligible part of dynamics of international capital flows. I employ this micro-to-macro approach to revisit some of the main questions in international economics. My proposal has two strands linked by this common approach. In the first of these strands, I employ a novel data at the agent-transaction level on the Balance of Payment and the International Investment Position to evaluate the granularity of international flows and revisit the exchange rate disconnect puzzle, international business cycle comovement and the importance of valuation effects on external adjustments. The particular questions that I propose tackling are: (1) Are the dynamics of international flows in a country driven, at least in part, by idiosyncratic firm-specific shocks? If so, by how much? (2) Do shocks to large firms affect the exchange rate? (3) Do large firms' financial linkages affect international business cycle comovement? (4) How does the distribution of valuation changes on foreign assets affect external adjustments? In the second of these strands, I assess the role of individual investors' beliefs on capital flows. I start by revisiting the Uncovered Interest Rate Parity puzzle and propose a decomposition framework to assess how much of its failure arises from investors' subjective beliefs and how much from their risk aversion. Once the importance of investors' beliefs is recognised, I ask the following questions: (1) Do exchange rate expectations affect investors' international portfolio allocation? (2) Are these beliefs heterogeneous across agents? What are their determinants? (3) Are global investors' beliefs consistent with the theoretical literature on currency crises?
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