14 - International asset markets
Published online by Cambridge University Press: 01 June 2010
Summary
The role of international trade and exchange in leading to welfare gains is one of the most basic topics in the economics literature. In recent years, this issue has been examined from the viewpoint of international risk sharing. There has also been a proliferation of international models of the business cycle, which seek to understand the mechanisms for the transmission of real and monetary shocks. Third, as international asset markets have grown in size and importance, there has been an increase in the variety of assets that are traded. Paralleling the growth of these markets is the increased interest in examining the empirical behavior of assets denominated in alternative currencies.
In this chapter, we begin by describing a real model of international trade and exchange that allows us to illustrate the role of risk sharing and portfolio diversification across countries. This discussion clarifies the ways in which international trade can lead to perfect sharing even in the absence of international capital flows. It also links to the literature on international business cycles. Next, we introduce a monetary model of international trade and exchange. For this purpose, we use a two-country model with cash-in-advance constraints in which purchases of goods must be made with sellers' currencies. We certainly do not mean to suggest that this is the only model or even the most commonly accepted model of exchange rates and asset prices.
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- Information
- Asset Pricing for Dynamic Economies , pp. 422 - 458Publisher: Cambridge University PressPrint publication year: 2008