Working Paper: NBER ID: w2417
Authors: Lars E.O. Svensson
Abstract: In a previous paper, "Trade in Risky Assets," I have analyzed the pattern of international trade in risky real assets between barter economies, relying on the Law of Comparative Advantage and using autarky asset price differences to predict the pattern of asset trade. In this paper the analysis is extended to international trade in nominal assets (assets with returns paid in currencies) between monetary economies. The risk characteristics of real returns on nominal assets depend on price level and exchange rate risk, and therefore on monetary policy. It is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets' return risk characteristics, their autarky prices, and hence their trade pattern, when countries differ with respect to their outputs or their attitudes towards risk. When world asset markets are incomplete, different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets, as well as on aggregate capital and current accounts.
Keywords: monetary policy; exchange rate risk; nominal assets; international trade
JEL Codes: F3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Different monetary policies (E49) | risk characteristics of nominal asset returns (G12) |
| price level and exchange rate risk (F31) | risk characteristics of nominal asset returns (G12) |
| risk characteristics of nominal asset returns (G12) | trade patterns of nominal assets (G15) |
| autarky prices (P22) | trade patterns of nominal assets (G15) |
| output differences and attitudes towards risk (D81) | autarky prices (P22) |