Capital Flows and Asset Prices [with Comments] This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: NBER International Seminar on Macroeconomics 2007 Volume Author/Editor: Richard Clarida and Francesco Giavazzi, organizers Volume Publisher: University of Chicago Press ISSN: 1932-8796 Volume URL: http://www.nber.org/books/clar07-1 Conference Date: June 15-16, 2007 Publication Date: January 2009 Chapter Title: Comment on "Capital Flows and Asset Prices" Chapter Author: Sebnem Kalemli-Ozcan Chapter URL: http://www.nber.org/chapters/c3008 Chapter pages in book: (224 - 229) Comment Sebnetn Kalemli-Ozcan, Associate Professor of Economics, University of Houston and NBER This paper by Aoki, Benigno, and Kiyotaki (ABK) provides a useful sequel to their influential 2006 paper. Both papers rest on the observa- tion that upon capital account liberalization, countries experience large swings both in the value of fixed assets and in the available amounts of foreign and domestic credits. The authors argue that although these changes are observed both by industrial and emerging market coun- tries, they are ignored by the standard models. In particular, the authors would like to know how does the adjustment to capital account liberal- ization depend on the degree of development of domestic financial in- stitutions and why the economies with underdeveloped financial sys- tems are more vulnerable to these foreign and domestic credit shocks? To answer these questions, they develop a model of small open econ- omy, where it is difficult to enforce debtors to repay their debt unless it is secured by a collateral. The fixed asset (land) acts as collateral and the borrower's credit limit is affected by the price of the fixed asset, and vice versa. The interaction between credit limits and the asset prices turns out to be a propagation mechanism, which may generate large swings in aggregate economics activities.