History, Gravity and International Finance

Abstract

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 distance effect in banking and trade

“…Precursors include Rose and Spiegel (2004), Buch (2005), Aviat and Coeurdacier (2007), Coeurdacier and Martin (2009), Papaioannou (2009), Houston, Lin and Ma (2012), Herrmann and Mihaljek (2013), and Brüggemann, Kleinert and Prieto (2014), in addition to papers focusing on portfolio holdings (e.g. Portes and Rey, 2005, or Lane and Milesi-Ferretti, 2008, Chitu et al, 2015. Importantly, these studies are limited in their methods and data availability, and do not focus on the role of distance over time (except for Buch, 2005).…”

Bank secrecy in offshore centres and capital flows: Does blacklisting matter?

“…The relevance of the stigma effect has become increasingly important in recent times, when policymakers, regulators and scholars seek to understand which institutional, regulatory and historical features can attract or discourage international capital flows (Papaioannou, 2009;Reinhardt, Ricci, & Tressel, 2010;Houston et al, 2012;Qureshi, Ostry, Ghosh, & Chamon, 2011;Milesi Ferretti & Tille, 2011;Chitu, Eichengreen, & Mehl, 2013). The financial effects of regulation are particularly relevant when the AML/CFT rules are under discussion.…”

Hidden in plain sight: Correspondent banking in the 1930s

“…73 Other studies adopting similar gravity specifications, using banking/financial data as a dependent variable, have used alternative measures to proxy trade, such as the host country's geographical latitude 74 or transport costs. 75 In the absence of available data on country-pair transport costs for the extensive geographic coverage of our historical dataset, we have created a 'relative factor endowment' instrument, drawing from trade theory. To this purpose we have classified i and j as labour, land or capital rich, based on a country's dominant economic sector and its role in global trade.…”