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History, Gravity and International Finance

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  • Livia Chițu
  • Barry Eichengreen
  • Arnaud J. Mehl

Abstract

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.

Suggested Citation

  • Livia Chițu & Barry Eichengreen & Arnaud J. Mehl, 2013. "History, Gravity and International Finance," NBER Working Papers 18697, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18697
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    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 18:42:30

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    2. Kugler, Maurice & Levintal, Oren & Rapoport, Hillel, 2013. "Migration and Cross-Border Financial Flows," IZA Discussion Papers 7548, Institute for the Study of Labor (IZA).
    3. Chiţu, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," Journal of Development Economics, Elsevier, vol. 111(C), pages 225-245.
    4. Mikhail Stolbov, 2017. "Assessing systemic risk and its determinants for advanced and major emerging economies: the case of ΔCoVaR," International Economics and Economic Policy, Springer, vol. 14(1), pages 119-152, January.
    5. Brei, Michael & von Peter, Goetz, 2018. "The distance effect in banking and trade," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 116-137.
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    7. Jordi Paniagua, 2015. "A gravity model for foreign re-investment," Economics Bulletin, AccessEcon, vol. 35(1), pages 627-632.
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    10. Peter J. Buckley, 2016. "Historical Research Approaches to the Analysis of Internationalisation," Management International Review, Springer, vol. 56(6), pages 879-900, December.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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