Working Paper: NBER ID: w0516
Authors: Willem H. Buiter
Abstract: This paper analyzes the implications of international asset risks for the operation of the international adjustment process, with special emphasis on the scope for monetary policy. After a brief review of actual practice in the evaluation of country risk, the paper discusses a number of modifications in the standard theory of efficient international financial markets that are necessitated by the existence of country risk., For macroeconomic policy, the major implications are that domestic and foreign assets become imperfect substitutes and that world demand for domestic assets is likely to be less than perfectly elastic, even in the "small country" case, Even under a fixed exchange rate, a measure of domestic control over domestic interest rates therefore exists.
Keywords: international asset risk; political risk; sovereign risk; monetary policy
JEL Codes: F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political risk (P26) | domestic and foreign assets are imperfect substitutes (G15) |
| political risk (P26) | supply of loans becomes less elastic (E51) |
| political risk (P26) | raises transaction costs (D23) |
| domestic monetary policy (E52) | domestic interest rates (E43) |