This article summarizes our views on the role of an 'aggregation bias' in explaining the PPP Puzzle, in response to the several papers recently written in reaction to our initial contribution. We discuss in particular the criticisms of Imbs, Mumtaz, Ravn and Rey (2002) presented in Chen and...

We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When...

We provide an overview of the recent developments of the literature on the determinants of long term capital flows, global imbalances and valuation effects. We present the main stylized facts of the new international financial landscape in which external balance sheets of countries have grown in...

Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer...

We propose a simple quantitative method to linearize around the risky steady state of a small open economy. Unlike when the deterministic steady state is used, the net foreign asset position is well defined. We allow for both stochastic income and stochastic interest rate.

We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information heavily determines the pattern of international...

This paper develops a theory of financial crisis based on the demand side of the economy. We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes. In a two-country model, we show that financial and trade...

On the international scene, away from national legal rules, the use of different currencies is largely due to the operation of the 'Invisible Hand'. The paper develops a three-country model of the world economy and links real trade patterns with currency exchange structures in a general...

This paper takes a systematic look at the portfolio choice problem faced by investment banks or funds investing in transition economies. We relate the performance of projects in the transition economies to the broader macroeconomic and international environment, which affect the project through...

The paper presents a two-country macroeconomic model in which the number of financial assets is endogenous. Imperfect substitutability of assets and international transaction costs give a comparative advantage to large markets, because of demand effects. Agents have more incentives to undertake...