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

Format:

Book

Author/Creator:

Krugman, Paul R.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0651.

NBER working paper series no. w0651

Language:

English

Subjects (All):

Foreign exchange.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1981.

Cambridge : National Bureau of Economic Research, 1981.

Summary:

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.

Notes:

Print version record

March 1981.