History, Gravity and International Finance
We analyze patterns of bilateral financial investment using data on US investors' holdings of foreign bonds. We document a "history effect" in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors' foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit together with endogenous learning. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.
The authors are grateful to Sandro Andrade, Nicolas Coeurdacier, Livio Stracca, Andy Rose and Frank Warnock for comments and suggestions as well as to Michael Bordo, Jerome Busca, Martin Evans, Roberto De Santis and Shang-Jin Wei for helpful discussions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the ECB, the Eurosystem or of the National Bureau of Economic Research.
ChiÅ£u, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "History, gravity and international finance," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 104-129. citation courtesy of