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History, gravity and international finance

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  • Eichengreen, Barry
  • Mehl, Arnaud
  • Chiţu, Livia

Abstract

We analyze persistence in patterns of bilateral financial investment using data on US investors’ holdings of foreign bonds. We document a “history effect” in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors’ foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in currencies other than the dollar. Our findings point to history and path dependence as key sources of financial market segmentation. JEL Classification: F30, N20

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1466.

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Date of creation: Sep 2012
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Handle: RePEc:ecb:ecbwps:20121466

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Related research

Keywords: geography of asset holdings; Gravity Model; Hysteresis; International Finance; international role of the dollar; Persistence;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. History matters: even in very deep and heavily traded markets
    by Nicholas Gruen in Club Troppo on 2013-01-21 12:42:30
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Cited by:
  1. Maurice Kugler & Oren Levintal & Hillel Rapoport, 2013. "Migration and Cross-Border Financial Flows," Working Papers 2013-05, Department of Economics, Bar-Ilan University.
  2. repec:idb:brikps:81941 is not listed on IDEAS
  3. Owsiński, Jan W. & Pielak, Aneta M. & Sęp, Krzysztof, 2013. "Smartness, culture and local authority ICT awareness: an empirical enquiry for a province in Poland," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 115(2), June.

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