Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets / Paul R. Krugman.

By:

Krugman, Paul R

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0651.Publication details: Cambridge, Mass. National Bureau of Economic Research 1981.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: This paper is an attempt to examine some of the microeconomic foundations of this last view of the link between current accounts and exchange rata. Several authors, especially Kouri and de Macedo (1978), but also more recently Dornbusch (1980), have sought to justify the portfolio approach in terms of finance theory, deriving asset demands from a mean-variance framework and arguing that differences in the portfolios of different countries explain why changes in the world distribution of wealth affect exchange rates. What I will do in this paper is to argue that, even under seemingly favorable assumptions, these distribution effects nay run the wrong way; that if they run the right way, they will be very weak; and that the incentives for inter-national, portfolio diversification are in any case small, and can be swamped by quite modest transaction costs or other costs to diversification.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0651 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0648 International Capital Flows under Full Monetary Equilibrium: An Empirical Analysis /	nber w0649 Dividend Yields and Stock Returns: A Test for Tax Effects /	nber w0650 Some Theoretical Aspects of Base Control /	nber w0651 Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets /	nber w0652 The Federal Minimum Wage, Inflation, and Employment /	nber w0653 Indexation of the Minimum Wage with Rational Expectations /	nber w0654 Early Retirement Pension Benefits /	Next

March 1981.

This paper is an attempt to examine some of the microeconomic foundations of this last view of the link between current accounts and exchange rata. Several authors, especially Kouri and de Macedo (1978), but also more recently Dornbusch (1980), have sought to justify the portfolio approach in terms of finance theory, deriving asset demands from a mean-variance framework and arguing that differences in the portfolios of different countries explain why changes in the world distribution of wealth affect exchange rates. What I will do in this paper is to argue that, even under seemingly favorable assumptions, these distribution effects nay run the wrong way; that if they run the right way, they will be very weak; and that the incentives for inter-national, portfolio diversification are in any case small, and can be swamped by quite modest transaction costs or other costs to diversification.