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History, Gravity and International Finance

  • Livia Chițu
  • Barry Eichengreen
  • Arnaud J. Mehl

We analyze 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 together with endogenous learning. 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 such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18697.

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Date of creation: Jan 2013
Date of revision:
Publication status: published as Chiţu, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "History, gravity and international finance," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 104-129.
Handle: RePEc:nbr:nberwo:18697
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