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History,gravity and international finance
Institution:1. University of California, Berkeley, USA;2. European Central Bank, Frankurt am Main, Germany;3. Paris School of Economics (Paris 1-Panthéon-Sorbonne), France;1. The Farr Institute of Health Informatics Research, University College London, London, UK;2. MARCH Centre, London School of Hygiene & Tropical Medicine, London, UK;3. Faculty of Medicine, University of Southampton, Southampton, UK;4. Paediatric Infectious Disease Research Group, St George''s University of London, London, UK;5. Child Health Research Foundation, Department of Microbiology, Dhaka Shishu Hospital, Dhaka, Bangladesh;1. Eötvös Loránd University, Institute of Business Economics, Department of Comparative Economics, Szép str. 2., 1053, Budapest, Hungary;2. Freie Universität Berlin, School of Business & Economics, Institute for East European Studies, Garystrasse 55, 14195, Berlin, Germany;1. Department of Economics and Finance, Brunel University, London, UK;2. CESifo, Munich, Germany;3. DIW, Berlin, Germany;4. Centre for Applied Macroeconomic Analysis (CAMA), Canberra, Australia;1. Department of Economics, The University of the West Indies, Cave Hill Campus, Barbados;2. EconomiX-CNRS, Université Paris Nanterre, 200 Avenue de la République, 92001 Nanterre, France;3. Bank for International Settlements, Centralbahnplatz 2, CH-4051 Basel, Switzerland
Abstract:We analyse patterns of bilateral financial investment using data on US holdings of foreign bonds. We document a “history effect” in which holdings seven decades ago continue to influence holdings today. 10–15% of the cross-country variation in US investors' foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit and endogenous learning. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.
Keywords:Gravity model  International finance  Geography of asset holdings  Hysteresis  Endogenous learning  International role of the dollar  F30  N20
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