We develop a new theory of international capital flows based on dispersed in-formation across individual investors. There is extensive evidence of informationheterogeneity within and across countries, which has proven critical to under-standing asset price behavior. We introduce information...

Recent crises have seen very large spikes in asset price risk without dramatic shiftsin fundamentals. We propose an explanation for these risk panics based on selffullling shifts in risk made possible by a negative link between the current assetprice and risk about the future asset price. This...

The use of different currencies in the invoicing of international trade transactions plays a major role in the international transmission of economic fluctuations. Existing studies argue that an exporter’s invoicing choice reflects structural aspects of her industry, such as market share and...

The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice, an aspect that was largely cast aside when the ad-hoc portfolio balance models of the 1970s were replaced bymodels of optimizing agents. We develop the...

In this paper, we examine formally Keynes' idea that higher order beliefs can drivea wedge between an asset price and its fundamental value based on expected future payoffs. In a dynamic noisy rational expectations model, higher order expectations add an additional term, which we call the higher...

Two well-known, but seemingly contradictory, features of exchange rates are thatthey are close to a random walk while at the same time exchange rate changesare predictable by interest rate differentials. In this paper we investigate whetherthese two features of the data may in fact be related....

There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange...

The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward...

The paper analyses the impact of financial liberalization and reform in emerging markets on the dynamics of capital flows to these markets, using a simple model of international investors' behaviour. We first show that the gradual nature of liberalization, combined with the cost of absorbing...

We develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare. An important feature of the model is deviations from purchasing power parity, caused by rigid price setting in buyers' currency. We find the following. First, exchange rate...