TY - JOUR AU - Hassan,Tarek Alexander TI - Country Size, Currency Unions, and International Asset Returns JF - National Bureau of Economic Research Working Paper Series VL - No. 18057 PY - 2012 Y2 - May 2012 DO - 10.3386/w18057 UR - http://www.nber.org/papers/w18057 L1 - http://www.nber.org/papers/w18057.pdf N1 - Author contact info: Tarek Alexander Hassan Department of Economics Boston University 270 Bay State Road Boston, MA 02215 Tel: 773/834-3291 Fax: 773/753-0851 E-Mail: thassan@bu.edu AB - Differences in real interest rates across developed economies are puzzlingly large and persistent. I propose a simple explanation: Bonds issued in the currencies of larger economies are expensive because they insure against shocks that affect a larger fraction of the world economy. I show that differences in the size of economies indeed explain a large fraction of the cross-sectional variation in currency returns. The data also support a number of additional implications of the model: The introduction of a currency union lowers interest rates in participating countries and stocks in the non-traded sector of larger economies pay lower expected returns. ER -