Working Paper: NBER ID: w3496
Authors: William H. Branson; Dwight N. Jaffee
Abstract: This paper provides a framework for analyzing the effects of symmetric and asymmetric changes in information about risk on equilibrium real interest rate spreads across countries. Following the literature on parameter uncertainty, improvements in information are modeled as reductions in estimated variances. The equilibrium interest differential is determined in a two country setting. The effects of changes in information on the differential are shown in cases where (a) all investors have the same information, (b) home investors have superior information about home assets, and (c) all investors experience an improvement in information about one asset. An improvement in information on European assets in "Europe 1992" will raise the interest differential on U.S. assets relative to European as investors shift toward European assets.
Keywords: globalization; information; capital mobility; real interest rates
JEL Codes: F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improvements in information quality (L15) | Decrease in estimated variances of returns (C22) |
| Decrease in estimated variances of returns (C22) | Affects equilibrium real interest rate spreads across countries (E43) |
| Improvements in information quality (L15) | Affects equilibrium real interest rate spreads across countries (E43) |
| Improvement in information about European assets in 1992 (N24) | Raise interest differential on US assets relative to European assets (E43) |