Famous Puzzles in International Finance

As if international finance is not puzzling enough, there are famous puzzles in international finance as well. Lucky for you! What I mean with puzzle is that empirical observations of the real world aren’t always compatible with the predictions of some theories.

This appendix discusses six well-known puzzles:

check.png The home bias in trade puzzle: People have a strong preference for consumption of their home goods.

check.png The home bias in portfolio puzzle: Home investors prefer to hold home equities.

check.png The Feldstein–Horioka puzzle: Savings and investment are highly correlated at the country level.

check.png The consumption correlation puzzle: Consumption is much less correlated across countries than output.

check.png The exchange rate disconnect puzzle: Short-term volatility in exchange rates doesn’t reflect that of the fundamentals.

check.png The purchasing power parity puzzle: ...

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