For more than 80 years, many macroeconomic analyses have been premised on the assumption that workers' nominal wage rates cannot be cut. Contrary evidence from household surveys reasonably has been discounted on the ground that the measurement of frequent wage cuts might be an artifact of...

In a model that is consistent with the existence of a home bias and with foreign investors that are less informed than domestic investors, we show that unexpectedly high worldwide returns lead to net equity inflows into small countries. In addition, a small country experiences net equity inflows...