Nominal assets play a major role in international financial markets, while trade in indexed bonds is not empirically relevant. As a result, agents are generally exposed to both price and exchange rate uncertainty. Nonetheless, previous research on net capital flows has assumed the presence of a risk-free vehicle to intertemporal asset trade. In this paper, we present a general equilibrium intertemporal model with trade limited to nominal bonds and equity. We find that the absence of a risk-free bond generally dampens net capital flows, thus making economies effectively more closed.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1569.
Find related papers by JEL classification: F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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