Abstract: How do countries hold their financial wealth? We construct a new database of countries ’ claims on capital located at home and abroad, and international borrowing and lending, covering 68 countries from 1966 to 1997. We find that a small amount of capital flows from rich countries to poor countries. Countries ’ foreign asset positions are remarkably persistent, and mostly take the form of foreign loans rather than foreign equity. To interpret these facts, we build a simple model of international capital flows that highlights the interplay between diminishing returns, production risk and sovereign risk. We show that small (and historically plausible) probabilities of defaults are capable of generating foreign asset positions that resemble those in the data. ___________________________ * We thank Mark Aguiar and Daron Acemoglu for insightful comments on a previous draft and Gian Maria Milesi-Ferretti for his advice in the construction of our dataset. We are also grateful to César Calderón, Alex Karaivanov, George Monokroussos, and Rashmi Shankar for excellent research assistance. The opinions expressed here are the authors ’ and do no
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